FOR OFmFCIAL USE ONLY - CM /' 4 ~? 93 - o/< REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Dacusect or The World Bank FOR OFmFCIAL USE ONLY - CM /' 4 ~? 93 - o/< REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE Report INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO USt165 MiLLION AND A PROPOSED CREDIT OF SDR 47.6 MILLION TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR A SIXTH AGRICULTURAL DEVELOPMENT BANK PROJECT May 1, 1986 No. P-4299-PAK This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS The external value of the Pakistan Rupee (Rs) is fixed in relation to a basket of reference currencies, with the US dollar serving as intervention currency. On November 30, 1985 the official exchange rate was: US$1.00 Rs 1.00 = Rs = US$0.061 FISCAL YEAR July 1 - June 30 ACRONYMS AND ABBREVIATIONS ADBP - Agricultural Development Bank of Pakistan FMCO - Functional Mobile Credit Officer mco - Mobile Credit Officer HCOI - Mobile Credit Officer for Intensified Schemes PLS - Profit and Loss Sharing RtTO - Regional Technical Officer SBP - State Bank of Pakistan SCARP - Salinity Control and Reclamation Project T&V - Training and Visits

3 FOR OMCILAL USE ONLY PAKISTAN SIXTH AGRICULTURAL DEVELOPMENT BANK PROJECT Loan/Credit and Project Summary Borrower: Beneficiary: Amount: Islamic Republic of Pakistan Agricultural Development Bank of Pakistan (ADBP) Loan: US$165 million Credit: SDR 47.6 million (US$55 million equivalent) Terms: Loan: repayment in 20 years including 5 years of grace, at the standard variable interest rate Credit: standard Relending Terms: Project Description: The loan proceeds would be on-lent to ADBP at cost, with repayment over 15 years, including 3 years of grace. The credit proceeds would be on-lent to ADBP at an annual interest rate of 4% (or equivalent under Islamic modes of financing), with repayment over 20 years, including 5 years of grace. The Government would bear the foreign exchange risk. The Project has the objective to further strengthen ADBP as a sound and self-sustaining lending institution. It would provide, through ADBP, loans to farmers for medium- and long-term agricultural investments in farm mechanization, implements and equipment, private minor irrigation, dairy development, poultry and other livestock, orchards, vegetables, minor crops and other on-farm development. The main risk is the effect of Islamization on ADBP's administrative costs and financial position. The project includes specific measures to minimize this risk. This document has a restricted distribution and may be used by recipiens only in the performuace of their official duties. Its contents may not otherwise be disclsed without World Bank authorization.

4 -ii- Estimated Costs: 1I/ Local Foreign Total - -- US$ million - Farm Development Loans Tractors Farm Implements Private Ninor Irrigation Dairy Development Poultry and other Livestock Orchards, Vegetables and Ninor Crops Other On-Farm Development FisherY Development Loans Project Loans for Agroindustry Short-Term Loans Vehicles and Equipment Training and Techn. Specialists Staff College Buildings Base Cost ,454.0 Physical Contingencies Price Contingencies Total Project Cost 1, ,670.7 Financing Plan: Local Foreign Total us$ million Borrowers' Contribution SBP Government ADBP and Other Financiers IBRD IDA , , / Includes US$173 million equivalent in taxes and duties.

5 -iii- Estimated Disbursements: FY87 FY88 FY89 FY90 FY91 Annual Cumulative Appraisal Report: No PAK, dated April 15, Rate of Return: n.a. Map : IBRD No

6 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT TO TH'E ISLAMIC REPUBLIC OF PAKISTAN FOR A SIXTH AGRICULTURAL DEVELOPMENT BANK PROJECT 1. I submit the following report and recommendation on a proposed Loan and Credit to the Islamic Republic of Pakistan for US$165 million and SDR 47.6 million (US$55 million equivalent), respectively, to help finance a Sixth Agricultural Development Bank Project. The Loan would have a term of 20 years, including five years' grace, at the standard variable interest rate; the Credit would be on standard IDA terms. The proceeds of the Loan would be onlent to the Agricultural Development Bank of Pakistan (ADBP) at cost for 15 years, including three years of grace. The proceeds of the Credit would be onlent to ADBP for 20 years, including five years' grace, at 4Z interest per annum (or equivalent under Islamic financing modes). PART I - THE ECONOMY 1/ 2. The most recent economic report, "Pakistan: Economic and Social Development Prospects" (No PAK, dated February 18, 1986), was distributed to the Executive Directors on March 3, Economic growth rebounded strongly in FY85 after the slowdown in the previous year. Assisted by a strong recovery in the agricultural sector, real GDP increased by 8.4Z, compared to 3.5% in FY84. Value added in agriculture grew by 9.9Z and in manufacturing by 8.6%. Both fixed investment and private investment rose by about 12%. Improved availability of agricultural commodities helped to reduce the rate of inflation to 7.5% from 8.4% in FY84. On the other hand, the budget deteriorated markedly, national savings decreased, and the balance of payments came under pressure. Government current revenues fell short of the budgeted amount while expenditures substantially exceeded the budgeted amounts. As a result, government borrowing from the domestic banking system increased from 1.9% of GDP in FY84 tu 3.9% of GDP. Reflecting largely the sharp drop in public savings, national savings fell from 12.8% to 11.2% of GNP. Although the immediate growth prospects are good, budgetary and balance o; payments developments will need to be carefully watched. 1I Parts I and II are substantially the same as those in the President's Report for the "SCARP Transition Pilot Project" (Report No. P-4273-PAK dated April 15, 1986).

7 -2-4. The balance of payments deteriorated in FY85. The current account deficit stood at US$1.6 billion, compared to US$1 billion in FY84. Lower exports and remittances were the main contributing factors. Exports declined by 7.3% as the country's major exports, cotton and rice, suffered the effects of lower prices and lower volumes, respectively. Furthermore, remittances declined for the second successive year, falling by 10.6% in FY85. According to recent projections, net migration is expected to decline and thus remittances will be! lower over the medium term. As a result of the higher current deficit and low net capital flows, the reserve drawdown reached US$960 million. Gross official gold and foreign exchange reserves were US$1.2 b llion at the end of FY85, which was equivalent to 2 months of imports of goods and services. 5. The process of gradually eliminating interest rates from the economy, initiated in 1980, was completed in July All transactions are now based on new financing modes consistent with Islamic principles. Existing interest-based commitments have been honored and transactions with foreign governments and financial institutions are not affected. It is too early to determine with any certainty the potential costs of Islamization. Undoubtedly, the operation of the new system will initially involve some costs, but whether long-run efficiency will be affected will depend on how the system is applied. To date, the Government has proceeded cautiously, and new financing modes have been applied flexibly and developments monitored closely. 6. The strong recovery in GDP growth in FY85 meant that the overall growth rate achieved in the first two years of the Sixth Plan was consistent with the improved performance achieved during the Fifth Plan period (FY79-83). Growth in national output (6.5Z), agriculture (4.2X), manufacturing (10.4Z), exports (11), and private investment (6.7X), though below Sixth Plan targets, was well above the rates achieved during FY70-78 and very respectable compared with the growth rates of other developing countries. Growth during this period--coupled with increased remittances--benefited large segments of the population. Performance improved despite a number of adverse factors: (a) a world recession; (b) a 30% decline in the external terms of trade after 1979; and (c) the Afghanistan crisis with its attendant expenditures for increased defense and refugee assistance. 7. Fiscal performance and the balance of payments improved significantly during the Fifth Plan. The overall budget deficit and Government bank borrowing, which in FY79 stood at 8.8% and 4.3% of GDP respectively, fell to 6.4% and 1.7% by FY83. As the levels of Government borrowing from banks dropped and overall credit expansion was restrained, the growth of the money supply slowed down and inflationary pressures lessened; inflation dropped from 8% to 5% by the end of the Plan period. The improved fiscal performance was largely the result of expenditure restraint rather than better revenue performance. Real expansion in current expenditures on economic and social services barely kept pace with population growth, and development expenditures declined relative to GDP. Government revenues remained constant at 16X

8 -3- of GDP, and public savings, having risen in the first half of the Plan period from 1% to 3.8% of GNP, dropped to 1.6% by FY83. Assisted by remittances, but alsz strong export growth, the current account deficit fell from 5% of GNP to 2Z by the end of the Plan Period. Gross reserves increased from 3.5 to 4.5 months of imports of goods and services. 8. In addition to improving economic management through fiscal and monetary policies, the Government took measures to improve performance in the commodity-producing sectors. In agriculture, all major crops reached record output levels, with wheat and sugar achieving self-sufficiency. Subsidies on pesticides were virtually eliminated, while fertilizer prices were raised to reduce the subsidy burden. Crop procurement prices were adjusted to bring them closer to world prices. Provincial allocations for operations and maintenance in irrigation were increased, along with water charges. Encouraged by improved policies and incentives, private manufacturing investment grew by 10.9% per annum. Areas open to the private sector were widened, most agricultural processing units were denationalized, and sanctioning limits increased. A flexible exchange rare policy adopted in 1982 was instrumental in stimulating manufactured exports, while import liberalization increased the availability of raw materials and capital goods. In energy, measures were taken to accelerate the development of domestic resources, rationalize prices, and improve policy formulation and energy planning capabilities. 9. The developments in Pakistan's economy since FY78 represent welcome steps toward the solution of problems that are essentially stuctural and long-term in nature. Nevertheless, further wide-ranging measures must be introduced to address structural issues. Pakistan's long-term growth prospects depend on the resolution of two such issues: (a) the need to increase the level and efficiency of public investment; and (b) the need to encourage export expansion and efficient import substitution. If Pakistan is to sustain high economic growth, it must make major infrastructure investments, upgrade existing facilities, and strengthen its neglected social base. The last has fared badly as a result of resource constraints, as is reflected in Pakistan's social indicators, which lag seriously behind those of other dt eloping countries at comparable levels of development. It will not be possible to increase public investment and recurrent allocations without a major domestic resource mobilization effort. Although Pakistan should give priority to reforming indirect taxation through a broad-based sales tax, it should also rely more on user charges, should curtail subsidies, and increase self-financing by public enterprises. Given the continuing constrained outlook for official assistance and the likelihood of lower remittance flows, sustained improvements in both export expansion and efficient import substitution will be necessary to support high growth with sustainable external capital requirements. If trade performance is to be improved, structural adjustment must be continued and strengthened in the key sectors of agriculture, industry, and energy. Both agriculture and industry have considerable potential for increased exports and some degree of efficient import substitution. In energy, the accelerated development of

9 -4- Pakistan's under-exploited resources can contribute considerably to the reduction of cnergy imports. 10. In agriculture, high growth has been largely the result of increased acreage; yet average yields remain low by world standards and by those of progressive farmers within Pakistan. Before agricultural productivity and diversification can be increased, institutional support must be strengthened, appropriate pricing policies must be put in place, and the core investment program identified and implemented. More effective institutional support should be sought through improvements in the quality and quantity of services to farmers. In particular, strengthening the seed program requires more efficient seed multiplication and dissemination, increased efficiency in public sector plants, and a greater role for the private sector. The delivery of agricultural credit also needs to be improved to ensure that it actually reaches small farmers and tenants, whose credit needs are greatest. Furthermore, marketing costs need to be reduced and research and extension services strengthened. Agricultural pricing policies should create appropriate incentives to farmers, while minimizing subsidies. Multicrop approaches to pricing should complement the single-crop, cost-of-production approach currently used. Finally, a core investment program in agriculture and water is needed to reduce the possibility of distortions in investment priorities. Low cost programs that yield quick returns should be emphasized along with critical infrastructure investments that raise farm productivity. Creater emphasis on the complementarity of investment programs, especially between agriculture and water, would ensure that priority is accorded to programs that increase agricultural productivity rather than merely augment the supply of physical infrastructure. 11. Despite fairly rapid industrial growth accompanied at times by rapid expansion of manufactured exports in recent years, there are a number of issues the Government must address if this performance is to be sustained. High levels of protection have led to high cost, low quality domestic production both by raising input prices and by reducing the demand for new technology to raise productivity and improve product quality. If Pakistan is to increase and diversify its manufactured export base and encourage efficient import substitution, industrial incentives must be rationalized to reduce both the level and dispersion of effective protection rates. The objective here is to increase the efficiency of the industrial sector by exposing protected producers to greater foreign competition and to reduce the antiexport bias inherent in the present incentives. In addition, the Government should reform the regulations affecting investment sanctioning and cost-plus pricing in order to improve competition among domestic firms. It should limit sanctioning to a few cases of strategic importance, leaving most investment decisions to the private sec_or, which is better able to assess investment opportunities. Cost-plus pricing arrangements with a number of key private and public manufacturing enterprises, which provide insufficient incentives to minimize costs or allocate capital efficiently, should be replaced by market-oriented approaches, which better reflect supply/demand

10 -5- conditions and provide adequate incentives for reinvestment and operational efficiency. 12. Issues that needed to be addressed in the energy sector pertain to three broad areas: (a) investment and development; (b) pricing; (c) institutional strengthening. In the power subsector, the Government has formulated a least-cost development plan for the period and has outlined a core investment program of Rs 30 billion consisting of high priority projects to be implemented during FY86 to FY88. Given the likelihood of domestic resource constraints and persistent power shortages, the Government is also undertaking a number of measures including tariff increases to ensure that a large portion of this investment program would be financed from WAPDA's self-generated resources. The gas producer pricing formula for new discoveries has been adjusted to provide adequate incentives to attract private sector exploration. Because consumer gas prices were kept artificially low to encourage the substitution of gas for imported oil, relative prices became distorted and the use of gas uneconomic. Since 1982, the Government policy has been to progressively increase consumer prices of gas in order to reach two-thirds of fuel oil parity by 1988; the FY86 budget increased the average gas price by over 50%. Assisted by domestic price increases and lower international prices for fuel oil, the Government's target has been realized. The Government should continue the policy of gradually adjusting gas prices with a view to reaching full parity as early as possible. Electricity tariffs, which are currently below the long-run marginal cost, should be adjusted to reflect this cost, not only to ensure the efficient use of electricity and encourage energy conservation, but also to mobilize the substantial additional funds required by the power investment program. Finally, the Government should consider increasing the autonomy of public enterprises in the energy sector to improve their efficiency and should continue to strengthen energy planning and policy coordination. 13. The Sixth Five-Year Plan (FY83-88) articulates a pragmatic strategy for Pakistan's continued rapid development that includes an expanded role for the private sector, increased public development expenditures, and increased allocations for energy, agriculture, irrigation, and the social sectors. Although the size and composition of the Plan are appropriate, development expenditures during the first two years of the Plan have been 8.5Z lower than the amounts projected because of insufficient domestic resources. Although this would not appear overly large, the way in which sectoral shortfalls have been distributed contradicts Plan priorities. Education, energy, health, and agriculture have received considerably lower allocations than called for in the Plan. Furthermore, without a predefined core investment program, there is a tendency to distribute shortfalls evenly over a large number of projects within a sector; thus too many projects have been initiated, and projects that should receive priority are underfunded. To address this issue, the Government has re-introduced a Three-Year Priority investment Program (FY86-88). The Government has emphasized that the adoption of a rolling medium-term program does not mean that plan strategies and priorities are being revised, or that shortfalls are considered inevitable.

11 -6- The program will merely identify sectoral core investment programs to be given priority in annual plans. If priority investments, especially in key areas, could be protected, the public investment program would become more effective and its priorities..ould be sharpened. 14. The improved performance and policy framework of the Fifth Plan, which the Government intends to continue during the Sixth Plan, have improved Pakistan's creditworthiness for a blend of Bank and IDA borrowing and commercial borrowing. At the end of 1984, Pakistan's external public debt (excluding the undisbursed pipeline) stood at US$9.9 billion, of which US$4.6 billion was owed to bilateral members of the Pakistan consortium, US$1.2 billion to OPEC, US$2.3 billion to multilateral agencies, and the balance to other bilateral and private lenders. At the same time, the Bank Group's share in Pakistan's external public indebtedness was 16.2%, and in external debt service it was 8.0%. According to Bank projections, if recent policy improvements are sustained and structural issues addressed, Pakistan's debt service will remain about 20% during the remainder of the 1980s, even with somewhat higher levels of commercial borrowing. PART II - THE BANK GROUP OPERATIONS IN PAKISTAN 15. As of September 30, 1985, the cumulative total of Bank/IDA commitments to Pakistan (exclusive of Loans and Credits or portions thereof that were disbursed in the former East Pakistan) amounted to approximately US$3.7 billion, and IFC's investments totalled $193.5 million. (Annex II contains a summary Statement of Bank loans, IDA credits, and IFC investments.) 16. During its long association with Pakistan, the Bank Group has been involved in most sectors of the economy. For example, it has participated with other donors, over a 20-year period, in a major program of works to develop the water resources of the Indus Basin. Approximately 30% of total Bank/IDA commitments to Pakistan have been for agriculture and irrigation; 28Z for industry, including import program credits; 18X for transport, telecommunications, and public utility services; 14% for energy, including power, gas pipelines, and petroleum; 5% for social programs in education, population, and urban development; and 5% for structural adjustment lending and technical assistance. 17. Currently, the Bank's assistance strategy is to support the Government of Pakistan's efforts to formulate and implement policy reforms in three sectors--energy, industry, and agriculture--which shape the structural adjustment of the economy. To ensure that the gains from adjustment are sustained in the long term and shared more broadly, the strategy also includes investments in physical infrastructure and the social sectors (education, population, etc.) that have been neglected in Pakistan's development efforts. If this strategy is to succeed, the full range of traditional instruments of Bank support must be flexibly deployed--from sector work and

12 -7- active policy dialogue, to policy- and projecl-based lending, technical assistance and aid coordination. The Bank Group's lending program comprises two components, the larger of which supports specific high-priority investments in productive sectors and physical and social infrastructure. The smaller but nonethelesl strategic component focuses on policy reforms in the key sectors of agriculture, industry, and energy and relies heavily on highquality economic and sector work. The program includes a series of technical assistance credits to finance studies and formulate action programs for policy reform. The experience with the first of these has been extremely positive. In addition, through its annual CouAtry Economic Memorandum, the Bank Group tries to foster greater understanding on the part of Consortium members of the Government's structural adjustment program and aid requirements. This effort, coupled with increased cofinancing, should enhance the policy relevance and effectiveness of other official aid and help attract additional resources to Pakistan from nonconcessional sources. 18. Historically, the Bank Group has placed special emphasis on lending for agriculture, which is the mainstay of Pakistan's economy. The Bank and the Covernment have agreed that the main objective of the agricultural strategy and, consequently, lending to the sector should be to increase agricultural productivity through improvements in the efficiency of the irrigation system and supporting agricultural services. Among the issues being addressed are: the balance between short-gestation projects and projects with a longer-term focus, rationalization of input and output prices, marketing, improvements in operation and maintenance, cost recovery, and a wider role for the private sector. Projects in the sector have ranged from irrigation/drainage to agricultural inputs, research, and extension and have included institution-building components. Overall, progress in agriculture has been satisfactory. 19. In industry, the strategy has two complementary aspects: to strengthen and broaden the structural adjustment in Pakistan's industrial sector and to support the Government's efforts to revitalize the private sector through industrial financing. The industrial reform program has been designed to improve the competitiveness of the sector with a view to promoting export expansion and imdort substitution. Issues being addressed include trade and industrial incentives, deregulation, efficiency of public enterprises, pricing decontrol, and improvements in the credit delivery system. Lines of credit extended to development finance institutions and other financial intermediaries have been mainly f r the private sector. Direct lending for industry has also included assistance to three large fertilizer plants and a refinery engineering loan. IFC's investments in 16 Pakistan enterprises were by way of loans (US$182 million) and equity participation (US$11.3 million); these are shown in Annex II. Although individual operations have generally achieved their objectives, the agenda for overall industrial reform remains formidable. 20. As a result of the progress under the Structural Adjustment Loan (SAL) in 1981/82 and the Energy Sector Loan in 1985, our lending program in

13 -8- energy is expanding rapidly. The overall objective here is to expand the domestic supply from all energy subsectors and simultaneously increase the efficiency of energy use through appropriate pricing, conservation, and other methods of managing demand. No less central have been the efforts to strengthen key institutions in the sector. In power, the Bank has helped both the Karachi Electric Supply Corporation and the Water and Power Development Authority to finance their power generation and transmission programs. The construction of the Mangla and Tarbela dams under the Indus Basin Development Program, in which the Bank played a leadership role, has also assisted in achieving the objectives of the sector strategy. In oil and gas, the Bank has financed a sound exploration and development program and has assisted in developing the extensive gas transmission system. Smaller efforts, involving mainly engineering studies and technical assistance, have been undertaken to support coal exploration, energy audits, and oil refining. Despite much progress, however, the Bank will need to continue participating in institution building and help the Government mobilize adequate funds for energy investments through tariffs, co-financing, and greater private sector participation. 21. Bank Group lending for transport and communications has focused both on new capital investments and on improving the efficiency of existing assets. Efforts have also been made to strengthen the institutions responsible for these services, especially the Karachi Port Trust, Pakistan Railways, the Telephone and Telegraph Department and federal and provincial highway agencies. However, inadequate transport infrastructure is now considered to be critical constraint to overall growth, in large measure because infrastructure stock has run down. Thus, the balance between new investments and the efficient operation and maintenance of existing investments needs greater attention. 22. With an overall literacy rate of only 24%, a population growth rate of about 3.1%, and rapid urbanization, Pakistan faces an equally formidable development agenda in the social sector. The Bank has supported the Government' s programs in education through five credits designed to upgrade primary, post-secondary, and higher technical and agricultural education as well as middle-level training of primary teachers and agricultural extension agents. The focus has been and will continue to be on the lower end of the education spectrum (primary, technical, and nonformal education). A first population project designed to expand the demand for population control services was approved in FY83. Furthermore, the Bank has financed four projects in the urban and water supply sector. Besides providing urban services, these operations are designed to improve local resource mobilization and cost recovery; planning and efficiency of resource utilization; and urban management, especially at the provincial and municipal levels. 23. In addition to the above, policy-based lending was pursued through the SAL and an Energy Sector Loan mentioned in para. 20. The SAL program introduced a number of significant reforms in government development planning and in policies and programs in the agriculture, energy, and industrial

14 -9- sectors; by the time the loan was fully disbursed at the end of FY83, significant progress had been achieved in the above areas. The ESL supports the Government reform program for the energy sector and assists in the implementation of a core investment program for the sector. Continuing support for the structural adjustment process is envisioned under other sector loans in the next few years. 24. In general, disbursements have been satisfactory. Some projects have experienced initial delays owing to protracted government procedures for project approval (but these problems are now being addressed), and the procurement of goods and services. Rapid turnover of managerial and technical staff, partly due to migration to the Middle East and partly to budgetary constraints, has also been a problem in some projects. 25. A number of operations are currently being prepared or appraised. These include projects for power transmission, generation, and conservation; oil and gas exploration and development; coal development; lines of credit for industrial financing for the private sector, and for industrial subsector restructuring, balancing, and modernization; irrigation/drainage, and agricultural inputs and services; highway construction and maintenance; primary and informal education; urban development and water supply. Sector loans that would support further structural adjustment in industry and agriculture are being discussed with the Government. Where successful, such loans would provide a policy umbrella for projects in those sectors. To help the Government finance agricultural and other high-priority projects having low foreign exchange component, the Bank Group is financing some local expenditures on a case-by-case basis. 26. Economic and sector work provides the basis for the continuing dialogue between the Bank Group and the Government of Pakistan on development strategy, the sector and project lending strategy and operations, and the coordination of external assistance within the Pakistan Consortium. The work program emphasizes resource mobilization, structural adjustment in the three key sectors, and the development of the physical and social infrastructure. PART III - THE AGRICULTURE SECTOR AND AGRICULTURAL CREDIT 27. Role of Sector and Recent Performance. Despite its declining relative importance, agriculture continues to be the mainstay of Pakistan's economy. It contributes about 30Z of gross domestic product, provides about two-thirds of total exports, and employs approximately 55% of the country's labor force. After a period of sluggish growth in the 1970s, agricultural output rose rapidly at an average rate of 4.4Z per annum between FY79 and FY83. In FY84, partly due to untimely rains affecting the wheat crop and serious infestation of the important cotton crop, this growth trend was interrupted, resulting in a fall in agricultural value added. However, a return to the earlier rapid growth trend was reported for FY85, with a sectoral growth rate of nearly 10Z. Pakistan's potential for sustained high growth remains unrealized. Yields have stagnated, with expansion of acreage

15 -10- alone providing the bulk of the increase in output. Application of existing technologies by farmers to close this yield gap is constrained by various factors, including deficient provision of key inputs including research, extension and credit. Government Policy and Bank Group Assistance and Strategy 28. Over the past six years, performance of the sector and prospects for overcoming the above production constraints have been closely linked with the Government's sectoral policies. The Government's National Agricultural Policy, announced in 1980, emphasized: (i) a progressive adjustment of prices of key agricultural inputs and outputs to reflect real resource costs; (ii) a gradual transfer to the private sector of activities such as the distribution of key inputs and the exploitation of fresh groundwater; (iii) a re-orientation in recurrent and investment expenditures on optimizing the use of existing irrigation facilities, rather than on new, large infrastructural investments; and (iv) a substantial increase in credit delivery to boost agricultural production. These policies recognize that sustaining agricultural growth and extracting the potential benefits of huge investments made thus far in irrigation infrastructure would require improved operation and maintenance (O&M), increased efficiency and reliability of water delivery and use, expanded drainage facilities in saline groundwater (SGW) areas, and improved supporting agricultural services, including credit. Actions taken by the Government to implement these policies were sustained through FY83 supported by the Fertilizer Imports Credit (No PAK) and the Structural Adjustment Loan/Credit (No PAK/No PAY). In FY84 and FY85, however, the momentum slackened, particularly in phasing out water and fertilizer subsidies and in broadening privitization efforts. Through a proposed Agricultural Sector Loan (under preparation) efforts are underway to restore momentum to the pace of policy reform. Complementing the policybased lending operation cited above, the Bank has financed a spectrum of priority projects in on-farm water management, irrigation rehabilitation, drainage, extension and research, and credit. Further projects are planned in these areas and new operations may be added in agro-industries and the prevention of agricultural environmental degradation. This project focuses on credit. 29. Agricultural Credit - Sources and Policy. The delivery system for rural credit consists of three main outlets, the Agricultural Development Bank of Pakistan (ADBP) with a share of 42% in total agricultural lending in FY85, commercial banks with 42%, and the ;.ooperative banking system with 16%. Credit available to the agriculture sector grew from FY79 to FY85 by 32% annually, or US$85 million equivalent on average. In FY85, 63% of agricultural credit provided was short-term production credit, mainly provided by commercial banks and the cooperative system through the Federal Bank for Cooperatives (FBC), and the remaining 37% for medium- and long-term development loans, mainly provided by ADBP (87%).

16 -ll- 30. The banking system in Pakistan is controlled by the State Bank of Pakistan (SBP). SBP, through its Agricultural Credit Department (ACD), sets: (i) lending targets for the agriculture sector, with sub-targets for ADBP, commercial banks, and cooperative banks; (ii) targets for lending to farmers with 25 ac or less; and (iii) ceilings on medium- and long-term Lending by commercial banks and cooperative banks. ACD works under guidelines in the Annual Credit Plan drawn up by the National Credit Consultative Council. SBP is also responsible for the policy directives regarding Islamization of the banking system as initiated by the Government in In recent years, ADBP and FBC have been heavily dependent on SBP funds to finance expansion programs. As approved by SBP, their policy objectives are to concentrate efforts on increasing the volume and number of loans, particularly to farmers with 25 ac or less, and, at the same time, to improve portfolio quality through better loan appraisal and supervision. 31. Issues in Agricultural Credit: Over the years, the Bank Group has focused on improving the efficiency of the delivery of credit by building the Agricultural Development Bank of Pakistan into a viable and sound institution. There may be scope to expand Bank assistance in future operations to the agricultural credit system as a whole and to relate agricultural credit to the country's overall financial system. This matter will be closely followed in the course of implementation of the proposed project. A second set of issues revolve around the beneficiaries of credit, the assets and services for which it is used, its impact on agricultural productivity and cost recovery. Again, the series of ADBP projects have tackled all these aspects and have offered lessons which need to be examined and possibly replicated within the framework of the agricultural credit system as a whole. Thirdly, the recent Islamization of Banking in Pakistan has necessitated a number of modifications under the proposed project to ensure soundness in ADBP's lending operations. Some of these considerations are likely to apply to other lenders of agricultural credit as well. Islamization and the experience and lessons from past ADBP operations are examined below. Islamization of Banking 32. Background: Since 1979, elimination of interest from the banking system has taken a prominent place within the policy of Islamization of the economy. In February 1985, SBP started to use Islamic modes for lending funds to ADBP, and in April 1985 ADBP also started using Islamic modes of financing. 33. Modes of Financing: Modes of financing relevant to agricultural finance in the Islamic banking system are: lending with service charge; trade-related financing through mark-up (morabaha), leasing, and hirepurchase; investment financing through profit-and-loss sharing (PLS or musharika). Of these, leasing and hire-purchase are also used in conventional interest-based banking. Service-charge financing does not involve interest, but the financial intermediary may recover a service charge, limited to a proportionate cost of the operation. In the case of ADBP, the

17 -12- limit is 3% per annum. Under mark-up financing (about 40Z of ADBP's annual lending), the financial institution purchases assets involved in the operation and sells them with a margin of profit that is mutually agreed with the client. The agreed price is payable on a deferred basis, either in a lump sum or installments. Under lease financing (about 5% of ADBP's annbal lending), the financial institution as lessor provides medium- or long-term credit for acquiring assets on a deferred payment basis. The lessor retains ownership and the lessee obtains the possession and use of the assets and bears all operating risks. Ownership is transferred at the lessee's option on payment of the nominal residual value determined by the lessor. Hire-purchase financing (about 50Z of ADBP's annual lending) also provides credit for acquiring assets on a deferred payment basis. The hirer pays the acquisition value of the assets in installments over an agreed period during which a pre-determined amount of rent has to be paid with each installment. At the end of the agreed period the hirer may exercise the option to purchase the assets upon payment of the last installment. Profit-and-loss sharing is technically a partnership between a financial institution and client in which both agree to contribute capital and/or labor in a specified venture. Profits are shared according to a pre-agreed formula. Losses, if any, are shared in proportion to the funds contributed by each party. 34. SBP has fixed the various rates of return to be applied under Islamic banking at 10-20% per annum for trade-related modes, and at not less than 10% per annum for investment modes. In FY85, SBP extended the concept of mark-up to term financing and specified a 10% per annum minimum, but set no maximum rate of return. Under Islamic banking, financial institutions have more flexibility to set rates than under a fixed-interest rate structure. The overriding objective in determining the new rate structure for ADBP was to keep the cost of financing to farmers no higher than under the interest-based system. Accordingly, ADBP has fixed the rate of return or mark-up for traderelated modes of financing at 12% per annum plus a charge of 3Z of each installment due, which charge may be waived in cases where installments are paid within one month of the due date. The service-charge, currently fixed at 3Z, is to be confirmed each year on the basis of ADBP's audited annual accounts. For profit-sharing, the ratio will be determined on the merit of each case. Calculation of the service charge and of profit-and-loss will be done on the basis of daily balances. For trade-related modes, returns will be calculated on balances that are being reduced each year. Calculations indicate that a 12% per annum rate of return on leasing, hire-purchase, and mark-up modes would generate cashflow and total income from each agreement that are approximately equivalent to an interest-based rate of 11% per annum. Under the assumption that recoveries will not deteriorate, the trade-related modes are considered satisfactory; however, income from service-charge lending is too low and profit-and-loss sharing is subject to considerable risk. Therefore, ADBP has decided to limit its aggregate firancing under these two modes to 2% of its annual total volume of financing. Repayment discipline among clients is unlikely to deteriorate, and may even improve because, under

18 -13- Islamnic banking, tribunals will be set up to deal with all suits in connection with financing agreements within a period of 90 days, which may have a positive effect on the number and volume of default cases. Procedures for Islamic Banking 35. In March 1985, ADBP distributed an Islamic Banking Manual to all regional and branch offices. It detailed procedures to be applied for the most important Islamic financing modes, set out accounting and recovery procedures and computerization guidelines. On the accounting side, the manual contained deviations from internationally accepted accounting standards in two areas: first, from the principle that income should be accounted for on the accrual basis, that is, only income actually earned in an elapsed period should be credited to the income account at the end of fiscal year (The manual prescribed that the income from an installment payment account should be credited wholly for the fiscal year in which payment is made, irrespective of the actual lending period covered in that year); and second, from the principle that total income for each financing agreement is accounted for on reducing balances. Instead of calculating and accounting for income on reducing balances ADBP decided to equalize income over the life of each financing agreement. Following this procedure a portion of income would be deferred in early years of repayment and earned in later years. The effect of these two deviations has been discussed with the Government and ADBP and agreement reached that these accounting procedures would be suitably corrected (paragraph 73). 36. Collateral: Under the trade-related modes, Leasing and hire-purchase financing will predominate in ADBP's activities. ADBP will remain the owner of all goods in the possession of the lessee or hirer. Despite this change in the ownership situation, ADBP has not as yet introduced any changes in the existing requirements for collateral, that is, ADBP will continue to ask for collateral in the form of a land mortgage, but will accept up to 70X of the finance amount in the form of a lien or chattel mortgage. Land mortgage is the preferred collateral, because ADBP is not interested in repossessing other assets in the case of default after extensive use by a customer. Because of its psychological impact, the desire to retain at least some element of the land mortgage principle appears justified in all cases where land for mortgage purposes is readily available. However, this may lead to double collateral because under Islamic financing modes ADBP retains ownership of all assets financed. Also, the existing system does not accommodate the objective of facilitating access to credit by small farmers and the landless. Under the proposed project, ADBP would review its collateral system with the aims of making it compatible with Islamic banking and more accessible to small farmers and the landless (paragraph 69). 37. Conclusions: The three financing modes largely used by ADBP (markup, leasing, and hire-purchase) are satisfactory in principle, with a rate of return of 12X. However, under the proposed project agreements have been reached to: (i) introduce annual analysis of the effect of Islamic banking

19 -14- on income generation; and (ii) oblige ADBP to take appropriate measures to ensure increased profits if profitability falls below certain ratios (paragraph 73). Since income from service-charge lending is too low, and profit-and-loss sharing is subject to considerable risk, these should not be accepted as financing agreements eligible for reimbursement by the Bank Group, and the volume of finance made available under these two modes-should be limited to 22 of ADBP's total annual volume of financing. The effect of abandoning penal interest appears to be adequately offset by the system of bonuses introduced for punctual payment. The shortfall in income arising from early repayment of principal under equalized income procedures should be offset by calculating returns on reducing balances or other appropriate measures. Past Lending to the Agricultural Development Bank of Pakistan (ADBP): The Record 38. ADBP was set up in 1961 under the Agricultural Development Bank Ordinance to cater to the demand for development credit by the rural community. Its shares are held by SBP on behalf of the Government. ADBP is administered by a 12-member Board; its Chairman, appointed by the Government, is the Chief Executive. Since October 1978, when a professional banker was appointed as Chairman, ADBP's financial position and profitability have greatly improved. To cope with its rapid expansion, ADBP has continually made changes in its organizational set-up. The present organizational structure was adopted in Progress and Main Achievements 39. ADBP's lending volume in current terms in FY85 was ten times as high as in FY79, implying an annual average growth rate of 47%. This expansion was made possible to a great extent through the outstanding success of the mobile credit officer (MCO) scheme which, in its present form, was introduced in FY75, had covered 2,100 villages through FY80, and had reached 30,400 villages by the end of FY85. The MCO scheme greatly contributed to the sustained improvement in recoveries against current dues, which reached 89% in FY85. The scheme's objective is to help smallholders and landless tenants overcome reluctance to bank borrowing and to assist them in the preparation of loan applications, arranging for collateral within the passbook system and in all related administrative steps. 1/ In FY85, 88% of all lending under ADBP's general credit was achieved through the MCO scheme. In FY86, all financing under general credit, i.e excluding financing of agro-industries under special projects, will be done through the MCO scheme. 1/ The passbook system permits the lending institution to assess an applicant's land ownership and any mortgages on the land without checking with the Land Revenue Office.

20 In 1983, an ADBP Appraisal Unit was established which, with the help of consultants, reviewed existing appraisal practices and developed a new and simplified appraisal methodology. Tested and found suitable and costeffective, the method was introduced for all ADBP farm credit operations in However, training of MCOs in the new appraisal procedures is lagging far behind requirements and will have to be put on a systematic basis to achieve expected improvements in the quality of lending (paragraph 70). 41. ADBP technical wings have been established, first for private minor irrigation development, and more recently for livestock and farm mechanization, under the Agricultural Technology Department in order to foster diversification of Lending and to develop technology packages that can be applied to promote lending to small farmers. Constraints are the lack of qualified technical staff and, in some instances, the lack of clear focus on the objective. In recent years, ADBP has also made considerable progress in computerizing its operations. AlL loan operations are computerized, but difficulties have ensued as the result of the introduction of Islamic banking and the necessity to operate two separate loan accounting systems. It would be useful to consolidate the information management system in order to improve accuracy, speed in generating information and responsiveness to managers' needs. 42. Farmers with 25 ac or less 1/ were targeted as the recipients of 70Z of ADBP's medium- and long-term loans to farmers in FY84 and 75% of such loans in FY85. Farmers having 12.5 ac or less were to receive one-third of the share. Actual lending to farmers with 25 ac or less was 60% in FY84 and 71% in FY85. Of this lending volume, 30% in FY84 and 38% in FY85 was channeled to farmers with 12.5 ac or less. Sources and Application of Funds 43. ADBP's total asset) have grown at an average annual rate of 33% over the past three years. As of June 1985, the total was Rs 11,550 million (US$717 million). In FY86-89, loan disbursements are expected to grow from Rs 5,000 million (US$311 million) in FY86 to Rs 10,000 million (US$621 million) in FY89. These figures represent an average annual growth in loan disbursements of 25%, compared to 39% annually in FY Loan disbursements have been and will remain, by far, the largest application (661) of funds, followed by debt service (25%) and administrative expenditure (5%). 44. ADBP's applications were funded by three main resources: recoveries of loans, equity contributions from SBP and ADBP's profits, and additional borrowings. Recoveries are expected to cover about one-third of total applications; the remaining two-thirds would come from new borrowings and 1/ Of irrigated land. One acre of irrigated land is assumed to be equivalent to two acres of rainfed land.

21 -16- contributions to equity substantial enough to maintain the debt-equity ratio at an acceptable 7:1 level. Following allocation of profits to ADBP's general reserves, SBP annually subscribes the additional capital necessary for this purpose. ADBP's volume of lending can only be met by increased borrowing from SBP, which operates within general credit allocation limits set by the Government. Problems with credit allocations for agriculture are not expected. 45. ADBP's continuance as a viable and effective banking institution is dependent upon its ability to recover its loans. A first step to improve the quality of its portfolio was made in 1979 when an assurance was obtained under the Fourth ADBP project (Cr. 957-PAK) that the Government would not request ADBP to make emergency loans in the case of natural calamities. This policy assurance, which was strictly implemented, is in effect for the ongoing Fifth ADBP project (Cr PAKlLn PAK), and has also been obtained for this proposed project. Greatly improved recovery rates over the past four years are primarily the result of enhanced collection efforts by ADBP through its MCOs. Under the Fifth project, annual case-by-case reviews of overdues were introduced and a write-off policy established by which long overdue loans in the inactive portfolio are written-off and the amounts written-off are kept in memorandum form. The policy on write-offs would be continued during implementation of the proposed project (paragraph 73). Past Performance 46. Since 1965 the Bank Group has assisted ADBP in five projects with credits/loans totalling US$154.8 million. The first project (Cr.76-PAK of June 1965) reimbursed the foreign exchange cost of tubewells and farm machinery. In June 1968, as a short-range bridging operation (Cr.117-PAK), IDA provided US$10 million and US$5 million was provided by the Swedish International Development Authority. The third project (Cr.157-PAK for US$30 million) closed in The proceeds were used to finance the purchase of about 8,000 tractors, 4,600 tubewells, and the provision of spare parts and farm management services. The Project Performance Audit Report on Cr.157-PAK carried out by the Operations Evaluation Department 1/ concluded that the agricultural growth impact of the project had been positive, and estimated ex-post economic and financial rates of return exceeded the original estimates. The socio-economic impact of tractorization under the project in the context of introduction of intermediate mechanization (of cultivation but not harvesting operations) had been substantially consistent with recorded experiences in other countries. While the rate of return of tractor investments was generally satisfactory, actual increases in yields and cropping intensities were substantially less than forecast at appraisal. Although 1/ "Project Performance Audit Report: Pakistan - Third Credit for Agricultural Development Bank (Credit 157-PAK)," Report No. 2126, dated June 30, 1978 (Sec M78-559).

22 -17- tractorization led to displacement of tenants by the land-owner, as far as farm operations were concerned, the aggregate demand for farm labor was not significantly reduced because the use of tractors also created new demands for labor. 47. The fourth project (Cr. 957-PAK), comprising an IDA Credit of US$30 million and US$25 million equivalent from IFAD, was delayed until agreement was reached that ADBP would: (i) receive an interest rate spread of 7Z to cover administrative costs and provisions; (ii) bring the debt-equity ratio down to 7:1; (iii) improve the Level of recoveries and link branch lending to branch recoveries; (iv) build up adequate provisions for bad debts; (v) be exempted from payment of income tax; and (vi) diversify its Lending. The Credit became effective in June 1980 and was disbursed in three years. Under the project, loans to farmers exceeded IJS$500 million equivalent during the implementation period, almost double the amount estimated at appraisal, increasing ADBP's share of institutional agriculture credit in Pakistan from 24% in to 37% in 1982/83. This expansion was managed prudently and coincided swith a significant improvement in the quality of ADBP's loan portfolio and recovery rate. The share of credit provided by ADBP for tractors and other farm inputs was about the same as planned, with tractors accounting for 58%. The project focussed on everal issues. Foremost among them was ADBP's financial condition, which improved markedly in the course of the project and was quite sound by completion. Recovery of current loans reached 84% in FY83, and recovery of overdues, some very aged, was substantially improved. Considerable success was achieved in shifting credit from large landholders to smallholders, with 60% to the latter, a significant improvement. The Credit was closed after full disbursement on June , six months later than anticipated. 1/ 48. The fifth project (Cr.1380-PAK for US$47.8 million; Loan 2305-PAK for US$10 million) became effective in November IFAD jointly finances the project with US$25 million equivalent in support of ADBP's lending program to farmers with 25 ac or less. Additionally, in 1985 the Italian Government made available US$20 million to finance farm machinery and equipment of Italian origin. The project supports ADBP's medium- and long-term lending operations to farmers which, through its MCO scheme, are expected to cover all districts in the country by the end of the project period. Through project loans, ADBP finances medium- and long-term agricultural investments: tractors for farmers with 25 ac or less; farm implements and equipment; private minor irrigation; livestock; and on-farm development. By March 31, 1/ A Project Completion Report, prepared by ADBP, was submitted to OED in January 1985; the Project Performance Audit Report has recently been sent to the Government and ADBP for comment.

23 , 90% of the Credit, 46% of the Loan 1/ and 85% of the IFAD Loan had been disbursed, accounting for 83% of total funds. FulL disbursement is expected to be achieved in all categories by December 31, A preliminary impact assessment of the Fifth project indicates that ADBP achieved successes in several areas: (i) the MCO scheme was gradually extended to cover 88% of general credit lending in FY85: (ii) recoveries on total demand improved and are expected to improve further; and (iii) total disbursements continued to grow at extremely high rates. On the negative side, ADBP is still relying too heavily on lending for tractors, and efforts have to be continued to reinforce the trend toward a larger volume of lending for other investment purposes that has appeared for the first time in FY85. During FY85, ADBP introduced the Islamic banking modes in its lending operations (paragraph 32). This changed the entire rate structure of ADBP's lending and is expected to have also some repercussions on its profitability. 49. Past Bank Group lending to ADBP was also reviewed in a recent OED Report covering twenty years of Bank assistance to Pakistan. 2/ The Report records significant achievements but also notes a number of issues that require attention in the future. On the positive side, OED notes that ADBP has become a much stronger and efficient institution for the delivery of credit; the recovery rate on new lending has risen from 54% in 1979 to almost 90% in 1985 and, during the same period, the volume of lending to small farmers has risen from Rs 119 million to Rs 2,717 million. On the negative side, OED makes two major criticisms. First, the Report contends that lending in support of tractorization has been too high in view of the lack of evidence that tractor mechanization has contributed significantly to growth in agricultural production. Second, that ADBP has not been used to mobilize savings in rural areas. 50. What evidence is available from the farm studies done to date in Pakistan on the impact of tractor mechanization on agricultural production is inconclusive. It is, however, apparent that investment in tractors has been financially attractive to farmers. Tractor prices are lower than world market prices due to the competitiveness of the market. Interest rates to farmers have been positive in real terms. Nevertheless, the Bank has in its lending encouraged ADBP to diversify away from tractors to other farm implements by capping the percent of credit/loan funds to be used for this purpose. For example, under the Third ADBP project (Cr. 157-PAK), 64% of credit proceeds were disbursed against tractors; this dropped to 58% under the Fourth project (Cr. 957-PAK), and will be less than 50% under the ongoing Fifth project (Cr. 1380/Ln.2305-PAK) and the proposed Sixth project. 1/ In each disbursement category the Credit funds are withdrawn before - the Loan funds. 2/ "World Bank in Pakistan; Review of a Relationship ," Report No. 6048, dated January 27, 1986 (Sec M86-119).

24 -19- Overall, we expect ADBP lending for tractors to drop from 59% of total lending in FY85 to 47% in FY89. Regarding the mobilization of rural savings, ADBP has few branches in rural areas and cannot effectively compete with the 7,000 branch network of the nationalized commercial banks. Therefore, ADBP has chosen not to make mobilization of savings a priority but rather to concentrate its efforts on increasing the number and volume of loans, particularly to small farmers, and to improve portfolio quality through better loan appraisal and supervision. Although scope exists for improving resource mobilization in rural areas, commercial banks have played a critical role in encouraging deposits in these areas. Rural deposits, in excess of Rs 40 billion, account for nearly half of the total deposit liabilities of commercial banks, in which an estimated 502 of rural households maintain savings accounts. The combination of lending facilities with deposit mobilization enables commercial banks to perform better than post offices in stimulating rural savings, despite the latter's better geographical average. PART IV - THE PROJECT 51. The proposed project was prepared by ADBP, with consultant assistance, and appraised in August/September Negotiations were held in Washington from March 24-28, 1986; the Pakistan delegation was led by Mr. A. Jamil Nishtar, Chairman, ADBP. A Staff Appraisal Report entitled "Pakistan: Sixth Agricultural Development Bank Project" (Report No.6041-PAK dated April 15, 1986) is being circulated separately to the Executive Directors. A supplementary project data sheet is attached as Annex III. Objectives 52. The two principal objectives of the project would be to: {i) further strengthen ADBP as a sound, effective and self-sustaining lending institution capable of reaching an increasing proportion of the rural community; and (ii) increase farm productivity and farmer incomes through the provision of credit and related technical support under ADBP's mobile credit officer (MCO) scheme. These objectives would be achieved by improving the efficiency of credit delivery through an exparnded MCO scheme that would focus on quality of lending; enhancing ADBP's ability to cater to the needs of small farmers through more intensive area coverage by MCOIs (MCOs for intensified schemes); and further improving ADBP's capacity to lend effectively 5 or priority investments, such as tractor implements and private minor irrigation, and for investment packages that promote the adoption of improved farm practices. Project Components Farm Development Loans 53. Tractors and Farm Implements. Lending for mechanization would cover investments for low, medium, and high-hp tractors, primary and secondary cultivation equipment and general farm machinery, such as grain threshers and

25 -20- reapers. The range of low-hp tractors has been expanded to include hp four-wheel tractors for use by small farmers to replace bullocks, and the high-hp range has been expanded, on an experimental basis, to include tractors with 80 hp and above for entrepreneurs engaged in custom hire. It It is estimated that by FY89 more than 55% of tractor sales will be replacements. However, in view of ADBP's diversification efforts and an expected slow-down in expansion of the tractor market, the share of tractors in ADBP's total lending is expected to decrease from 59% in FY85 to 47% in FY89. Under the proposed project, there would be increased emphasis on lending for nontractor farm implements, which is expected to increase as a proportion of tractor lending from 5% in FY85 to 13% in FY89, still very low when compared to standards in developed countries. As in the Fifth ADBP project, the eligibility for low and medium-hp tractor refinancing would be limited to loans made to farmers with 25 ac or less. To support lending for diversified investments, Bank Group financing of these tractors would be at a lower disbursement percentage than other financing. 54. Private Minor Irrigation financing would include medium- and Longterm investments by farmers to use groundwater or surface water for irrigation. Investments would cover construction or improvement of wells of all types and provision of pumping units (including power connection for electric units), installation of pumps, improvements in spring water utilization, and on-farm water management. Shallow tubewells and centrifugal pump sets powered by diesel engines or electric motors would be the most common type of investment. Deep tubewells with vertical shaft turbines or electric submersible pumps would be required in hilly areas with consolidated rocks and deep water tables. Also included would be finance for about 100 solar energy-driven low-lift pump sets with a peak capacity of 700 watts to be used by farmers in remote areas without electricity. 55. Dairy Development. Groups of milch animals, ranging in numbers from 2-5 each, are largely owned by small farmers, tenant farmers, and rural landless. They form part of a mixed cropping-livestock production system with farm-produced fodder rotated with food or cash crops. Investment loans would be made for a fodder production, in-milk buffaloes, dairy sheds and equipment, and veterinary supplies. 56. Poultry and Other Livestock. Loans for small-scale on-farm poultry units would cater for the construction of sheds, stores, and equipment, and for working capital requirements to purchase short-term inputs during the first season. About 75% of poultry investments are earmarked for broiler production due to greater demand attributable to a shorter crop season, simpler flock-rearing operation, and slightly higher profitability. Other livestock development activities include the production of mutton and wool 1/ Classes of tractor power are hp, hp, hp, and 80 hp and above.

26 -21- from sheep and goats, for which medium-term loans for low-cost barns/sheds and the purchase of lamb/goat breeding stock would be made available. Limited finance would also be made available for the purchase of draft animal pairs, with emphasis on draft-cum-milch animals. 57. Orchards. Vegetables. and Minor Crops. Deciduous and tropical orchard development is envisaged under the project. Investment costs covering seedlings, plantings, and other orchard establishment costs would be eligible for financing. Commercial vegetable farming, located around the main urban centers or specialized vegetable growing belts, has potential. With the introduction of polythene tunnels, the vegetable season would be extended, particularly for high-price early cauliflower, early tomatoes, and late carrots. Simultaneously, through a core of professional FMCOs, adoption of improved production technology for existing vegetables would be accelerated. Investments in improved production and marketing vould be done on an intt-s:ed basis, i.e., they would include supply and installation of mini-tunnels, yower sprayers, and farm-to-market transport. Also, minor crops, such as turmeric, coriander, garlic, cumin, mint and some aromatics, grown in specific locations, offer significant potential for development. During the project period, with the help of consultants, market research and on-farm trails started under the Fifth ADBP project would be continued, leading to identification of commercially viable minor crops that are candidates for investment. 58. Other On-Farm Development loans would include on-farm vater management, such as construction and lining of channels and drains, land leveling, construction of farm buildings, and provision of transport vehicles. From its on resources, ADEP would make short-term loans for seasonal inputs. Loans for fisheries development and agro-industrial investments would be financed by ADBP with the support of the Asian Development Bank under previously concluded loan agreements. Some farm equipment of Italian origin would be financed under an agreement concluded with the Italian Government in FY85. Institutional Development Assistance 59. Equipment. The proposed Loan/Credit would finance the procurement of equipment for ADBP-s headquarters, regional offices, and branches, consisting of: (i) computer equipment to be used by the Computer Department to speed-up data processing at the regional and branch level; (ii) audio-visual equipment for the Agricultural Technology Department to produce teaching and demonstration material for the staff colleges and Agricultural Technology Transfer Centers (ATTCs) to be set up in all regions; (iii) audio-visual equipment and cassette libraries for the ATTCs; (iv) audio-visual equipment and other teaching material for the ADBP staff colleges in Islamabad, Karachi, and Lahore; (v) office automation equipment for headquarters and regional offices; and (vi) telecommunication equipment to improve communications for data processing. For purposes of condu.-ting adaptive research, renewable energy equipment for various applications under Pakistani

27 -22- conditions would also be financed under the project. About 200 four-wheeldrive vehicles vould be financed from ADBP's own resources. Four buses would be procured for use in training and demonstration efforts. The a4option of more efficient tillage practices and the proper use of farm tractors of all sizes for various applications would be promoted by six mobile mechanization demonstration unite. These units would be equipped with tractors of sizes currently used in Pakistan and, additionally, with the hp tractors being introduced ac bullock replacement and, possibly, with tractors of 80-hp and above for testing in custom-hire arrangements. All tractors would have the full range of implements. 60. Technical Specialists: About 144 man-months of consultancy services would be financed under the project. Consultancy services would be provided ia technology development, training, computer applications, and other areas as required, including renewable energy, organization and management, and monitoring and evaluation. Consultants focusing on the development of technological packages related to farm mechanization, dairy development and horticultural investments for small farmers would be attached to the Agricultural Technology Department. For farm mechanization and horticultural development, agricultural technicians would be employed to supervise field work. Consultants engaged to train personnel in improved appraisal techniques and to redefine and redesign ADBP's training system would be attached to the Training and Management Development Department. Consultants in computer applications and, more specifically, software design, program analysis, and office automation, would be attached to the Computer Department and Office Automation Department, respectively. If necessary, consultants would also assist in preparing a follow-up project for possible Bank Group financing. Training: Provision would be made under the project for short-term training abroad of about 10 staff college instructors, 68 officers from headquarters, 30 regional and branch managers, and 30 MCOs. ADBP would make provision from its own resources for the construction of staff college buildin2s in Islamabad, Karachi, and Lahore to replace rented facilities with permanent ones. Cost Estimates and Financing 61. Project costs are based on ADBP's projected 3-year lending program for FY87-89, extended to 4.5 years in accordance with ADBP's disbursement profile, and are estimated at US$1,671 million, including about US$173 million in taxes and duties. Base cost estimates are in March 1986 prices. Price contingencies on local costs have been applied at 2.5Z for FY86 (three months only), 8.5% for FY87, 7.5% for FY88-90 and 6% for FY91, and on foreign costs at 0.8Z for FY86 (three months only), 7% for FY87, 7.25% for FY88, 7.6% for FY89, 7.65% for FY90, and 6% for FY91. Physical contingencies of 10% and 15% have been applied to civil works for private minor irrigation investments, and for the technical assistance and institution-building components, respectively.

28 The proposed Loan of US$165 million and Credit of SDR 47.6 million (US$55 million equivalent) would finance about 14.7Z of project costs net of taxes and duties. The remaining costs would be financed by SBP (59.5%), ADBP and other institutions (mainly the Asian Development Bank and the Italian Government) (16.6%), farmers' contributions (8.4%) and the Government (0.8%). ADBP's incremental lending (in current prices) for medium and longterm farm development loans would be US$63 million in FY87, US$72 million in FY88, and US$89 million in FY89. The proposed Loan/Credit would finance 98% of the total incremental lending. 63. The Government would onlend the proceeds of the Credit to ADBP at 4% or, under Islamic modes of financing, at an annual charge that would yield the equivalent of 4%. The Credit would be repayable to the Government in 20 years, including a grace period of five years for repayment of principal. The proceeds of the Loan would be onlent at cost, that is, at the flexible rate charged by IBRD or, under Islamic modes of financing, at an annual charge that would yield the equivalent of this rate. Repayment by ADBP of the Loan would be in 15 years, including three years of grace for repayment of principal. In accordance with general policy, the Government would bear the foreign exchange risk, while ADBP would assume the interest rate risk on the Loan proceeds. With these lending terms and conditions the Government would have an interest rate spread of 0.9% per annum on all funds to cover the foreign exchange risk. An assessment of the adequacy of this spread would be included in the annual reviews of ADBP's income and profits generating capacity. The Government would derive additional financial benefits from repayment by ADBP terminating 30 years earlier than repayment by the Government to IBRD/IDA for the Credit and five years earlier for the Loan. The lending terms and conditions would be included in a Financing Agreement between the Government and ADBP. The execution of this Agreement would be an additional condition of Loan/Credit effectiveness. In addition, assurances have been obtained that the Government would: (a) make available to ADBP additional funds required to implement the project at an interest rate of 4% per annum or equivalent, or at such terms and conditions as may be recommended in the annual review of ADBP's financial position (paragraph 73) and agreed on between the Government, ADBP and the Bank; (b) increase ADBP's paid-up capital as and when needed to keep its debt/equity ratio at 7:1 or better; and (c) not require ADBP to undertake emergency lending or financing except: (i) in the event of a major natural calamity; and (ii) as a disbursement agent for funds provided by the Government for such purpose. Procurement 64. Tractors, farm implements, irrigation equipment, dairy cattle, buffaloes, bullocks, and items for on-farm development of farmers' own choice would be procured through normal commercial channels. Prices are expected to be in line with world market prices. Exceptions would be tractors in the hp, hp and 80-hp and above ranges for which a competitive market does not exist. For small tractors, reimbursements would not be made unless at least three import licenses for each class of tractors have been issued by

29 -24- Government, or, as in the case of hp models, continue to exist. Thirty tractors of 80-hp and above and the full range of implements to carry out a market test, would be procured by ADBP through international competitive bidding procedures (ICB) following loan requests for such tractor and implement sets from firms or entities specializing in custom-hire work. Solar pumps would also be procured following ICB procedures. 65. Equipment for use by ADBP would be procured in bulk through ICB. For procurement under ICB, a preference limited to the prevailing customs duty or 15% of the c.i.f price, whichever is lower, would be extended to local manufacturers in the evaluation of bids. Equipment items which cannot be grouped together and costing less than US$100,000 for each contract, but not exceeding an aggregate amount of US$500,000, would be procured following local competitive bidding (LCB) procedures. Equipment items ccsting less than US$20,030 for each contract, but not exceeding an aggregate amount of US$200,000, would be procured after soliciting prices from at least three independent suppliers in accordance with procedures acceptable to the Bank. Procurement of computer equipment, which would have to be compatible with existing equipment, would be purchased directly from the original suppliers. Given the Government's reluctance to allow the importation of four-wheel drive vehicles, those required for the project would be treated as reserve procurement and would not be reimbursable out of the Loan/Credit proceeds. Tender documents and advertising procedures for all ICB procurement would be reviewed by the Bank before bids are invited, and bid evaluations would be approved before contract award. Bidders would be required to provide adequate assurance of after-sales service.

30 -25- Procurement Method /a (US$ million) Component ICB LCB Other N.A. Total Cost Credit Items 1.3-1, ,654.8 (1.3) - (212.5) - (213.8) Technical Assistance/ Institution Building: (i) Vehicles /b 5.0 (-) (-) (ii) Equipment /c (2.1) (0.5) (0.2) - (2.8) (iii) Consultants (2.3) (2.3) (iv) Overseas Training (1.1) (1.1) (v) Civil Works C-) C-) {-) TOTAL , ,670.7 (3.4) (0.5) (212.7) (3.4) (220.0) /a Figures in parentheses are amounts to be financed out of the Loan/Credit. Tb Reserve procurement. 7c Contracts of less than US$100,000 up to an aggregate amount of US$500,000. Id Contracts of less than US$20,000 up to an aggregate amount of US$200,000. Disbursements 66. As is the case in the ongoing Fifth ADBP project, the Bank Group would limit reimbursement of loans for low and medium-hp tractors to farmers with 25 ac or less. Within this formula, the proposed Loan/Credit would be used to finance: (a) 19% of amounts disbursed by ADBP on medium and longterm loans for low and medium-hp tractors; (b) 100% of foreign exchange and ex-factory expenditures or 60% of other local expenditures on the purchase by ADBP of equipment for its own use; for tractors of 80-hp and above; and for solar pumps for private minor irrigation; (c) 31% of amounts disbursed by ADBP for all other investment loans; and (d) 100% of expenditures on technical assistance and overseas training. Loans or financing extended on the basis of the Islamic modes of service-charge or profit-and-loss sharing would

31 -26- not be eligible for reimbursement (see paragraph 37). Disbursements for credit items, except solar pumps, and for equipment costing less than US$20,000 equivalent, would be made against certified statements of expenditure. Full documentation would be retained by ADBP for review by supervision missions and would also be subject to audit by independent auditors. Disbursements against solar pumps, equipment items exceeding US$20,000 equivalent, and all non-credit categories would be made against appropriate documentation to be forwarded to the Bank with the withdrawal applications. It is estimated that final disbursements would be made by December 31, Accounts and Auditing 67. Assurances have been obtained that ADBP's accounts would continue to be audited annually by independent auditors acceptable to the Bank and in accordance with procedures satisfactory tc the Bank. Audit reports would be provided in short and long form, would contain audit certificates and separate opinions on the use of funds withdrawn under the certified statement of expenditure procedures, and, together with the audited accounts, would be sent to the Bank within six months of the end of each fiscal year. ln general, ADBP is adequately meeting the accounting and auditing requirements under the ongoing Fifth project. Project Implementation 68. ADBP, as and when needed, wo-ild increase its headquarter and field staff and streamline its organizational structure and lending procedures in order to process expansion in lending volume. In the recent past these adjustments have been made as required and, given the efficient management of ADBP, no problems are expected in this regard under the proposed project. These improvements, and the envisaged increase of its MCO corps from its present 1,070 to 2,000 by FY89, would help ADBP attain the overall project objectives, facilitate access of small farmers to short-term and investment credit, and improve further the quality of its loan portfolio, and ensure adequate recovery levels. Preliminary results of a study on training requirements, undertaken in 1985 by ADBP with the assistance of a training consultant, confirm the need for major restructuring of ADBP's training system. Accordingly, by December 31, 1986, ADBP would be required to prepare and submit to the Bank for comment, a comprehensive staff training report including: (i) a detailed analysis of the training system, its needs and objectives, and any gaps in skills among incumbents; and (ii) long-term proposals and action plans for all future staff training activities also covering staff colleges, demonstration farms, and mobile mechanization demonstration units. By March 31, 1987, ADBP would prepare and implement a staff training plan based on annual targets specified in the training report; the plan would be updated annually and furnished to the Bank by March 31 in each year. The Training and Management Development Department (TMDD) would prepare, for submission to the Bank by September 30 each year, beginning in 1987, a report of its monitoring of all staff training activities. TMDD

32 -27- would closely coordinate with other departments involved in training activities. 69. Among the recent enhancements to the MCO scheme, the functional mobile credit officers (FMCOs) and the mobile credit officers for intensified schemes (MCOIs) are expected to play an important role in ADBP's diversification efforts. In parallel with the expansion of the use of FMCOs to more areas and to other investments, specifically primary tillage implements, ADBP has decided to introduce MCOIs in at least one district of each of the 27 regions where they would systematically approach all farmers in not more than five villages. Their lending targets would be conveyed as number of loans, not rupee value. Districts selected would be those with high potential for divers 4 ified lending, such as tubewells or tractor-drawn implements. Assuming that the basic principles of the collateral system would not be changed under Islamic banking, in districts with an MCOI collateral requirements could be relaxed on an experimental basis provided careful pre-investment screening and intensive supervision by ADBP take place. Assurances have been obtained that, by October 31, 1986, ADBP would submit to the Bank for concurrence: (i) a comprehensive action plan for expanding the use of FMCOs and MCOIs in the project period; and (ii) a review of its collateral system under Islamic banking with recommendations to (a) make it compatible with Islamic banking, and (b) facilitate access of smallholders and the landless to institutional credit. ADBP would be required to implement these proposals by June 30, The proposed project would support strengthening of the Farm Machinery Wing of the Agricultural Technology Department to enable it to promote improved technologies through training of MCOIs and FMCOs. Achieving this objective would be supported by the establishment of Agricultural Technology Transfer Centers (ATTC) on the regional level. ATTCs would operate under the responsibility of the Regional Technical Officers under the administrative control of regional managers. In addition, the Agricultural Technology Department would set up six mobile mechanization demonstration units, and a sufficient number of agricultural engineers, technicians, and equipment operators, fully conversant with farm machinery and operations, would be employed and trained. In-depth training of 6-8 months' duration to enable staff to function as instructors for MCOs and farmers would be conducted by machinery manufacturers abroad or in Pakistan, and would be supplemented in-house by the technical assistance team. An agreement has been reached with ADBP that: (i) suitably staffed and equipped ATTCs would be set up in all regions by June 30, 1987; and (ii) three mobile mechanization demonstration units would be operational by June 30, 1987 and another three by June 30, The Credit Policy and Appraisal Department would be strengthened to enable it to undertake, jointly with the staff colleges and TMDD, the training of all MCOs in the application of appraisal procedures introduced in Assurances have been obtained that the Credit Policy and Appraisal Department would, by December 31, 1986, be appropriately strengthened to: (i) complete training of all MCOs in the new appraisal

33 -28- procedures by December 31, 1987; and (ii) be able to modify and refine onfarm appreisal techniques on a continual basis. 71. Agreement has been reached with ADBP that it would continue to have all its financing approvals supported by on-farm appraisals. Authority for such approvals would be delegated by the regional managers to branch managers and MCOs in accordance with guidelines established by the Credit Division. In addition, financing applications for the installation of solar pumping systems for irrigation purposes would also have to be approved by ADBP's Agricultural Technology Department. The usual appraisal report would be supplemented by data to determine the technical and financial viability of a specific solar application. Assurances have been obtained from ADBP chat all project investments for solar pumping systems would be included in the normal monitoring and evaluation system and that between 102 and 20Z of such systems would be instrumented for intensive technical monitoring. ADBP Lending Terms and Conditions I/ 72. ADBP would make financing available to individual farmers and entities serving farmers and farmers' groups on the following terms and conditions: (a) on loans made before April 1, 1985, an interest rate of not less than 11% per annum, with an additional 3X penal interest in case of default; (b) on financing extended other than from the proceeds of the Loan and Credit on the basis of service charge, a service charge of not less than 3% per annum; (c) on other financing, a rate of return of not less than 12% per annum plus a charge of 3% of each installment, which charge may be waived in cases where installments are paid within one month of the due date; td) a once-and-for-all evaluation fee up to 0.5% of the amount of the loan or other financing; (e) farmers' and other customers' contributions: (i) by farmers owning 25 ac or less, a minimum of 5% of cost of investment; and (ii) by farmers owning more than 25 ac and, in respect of the 80-hp and above tractors, by other customers, a minimum of 10% of cost of investment. An assurance has been obtained from ADBP that it wilt, in each fiscal year, extend at least 75% of all medium and long-term farmers' loans or financing to farmers owning 25 ac or less and, within this lending volume,at least 50% to farmers with 12.5 ac or less. 73. While the financing modes under Islamic banking are in general acceptable, certain negative income effects may occur (paragraph 37). ADBP would have to analyze these effects in annual reviews and propose and implement, in consultation with the Bank, appropriate measures to ensure a continued satisfactory financial position and profitability. Accordingly, assurances have been obtained from ADBP that it will: 1/ On April 1, 1985, ADBP adopted Islamic modes of financing.

34 -29- (i) charge interest rates on loans made before April 1, 1985, and rates of return or service charge on financing provided from April 1, 1985 onward, that would be positive in real terms and sufficient to: (a) cover its operating expenditures and charges, including taxes, if any, and interest payments or returns, and service charges on borrowings; (b) make provisions for bad debts and maintain such provisions at a ratio to total overdues which is satisfactory to the Bank; and (c) accumulate reserves that would be adequate to ensure, in conjunction with contributions by SBP to ADBP's paid-up capital, that the ratio of debt to equity is not greater than 7:1; (ii} not pay dividends in any year in which profits fall short of the level required to fund the reserves in the manner described under (i) Cc) above; (iii) carry out, for the first time by December 31, 1986, and thereafter annually by December 31, an in-depth review of its past and projected income and profit generating capacity and on the basis of the review develop proposals to achieve the profitability required to fund the reserves; obtain the concurrence of the Government and the Bank to such proposals by March 31 of each year, beginning in 1987; and start implementing the agreed proposals not later than July 1 of each year, beginning in 1987; (iv) (v) (vi) charge: (a) interest rates of not less than 11% per annum on all outstanding balances of loans made before April 1, 1985; (b) service charges of not less than 3% per annum on all outstanding balances of funds made available on the basis of service charge; and (c) rates of return of not less than 12% per annum plus a charge of 3% of each installment, which charge may be waived in cases where installments are paid within one month of the due date, on all outstanding balances of funds made available on the basis of hire-purchase, leasing, mark-up and other such financing modes; limit: (a) its financing on the basis of service charge, profit-and-loss sharing, and any other modes of financing that may not generate income sufficient to cover expenses as outlined in Ci) above, to not more than 2% of its total lending; and (b) its lending for short-term loans or financing to no more than 20% of its total lending and other financing; apply the accrual principle in accounting for income (paragraph 35);

35 -30- (vii) in all cases of early repayment, calculate and collect the outstarding principal and income on the basis of reducing balances; (viii) continue to apply, at the end of each fiscal year, a permanent write-off policy, satisfactory to the Bank, of writing-off long overdue loans and other financing; and (ix) take all measures necessary to reach minimum recovery rates of at least 77% by June 30, 1987, 79% by June 30, 1988 and 81% by June 30, Monitoring and Evaluation (M&E) 74. During project implementation, monitoring and evaluation efforts by ADBP's M&E unit would be focused to provide a better assessment of the impact of project investments. At least 1% of financing agreements, stratified by Province and type of lending, would be monitored. As a basis for examining productivity and the impact of ADBP-financed investment, on-farm data would be collected from ADBP borrowers and, as a control sample, from a number of farmers not receiving financing. Close cooperation between the M&E Unit, the General Credit Operations Department, and the Computer Department would be required. To assess the adequacy of distinct lending terms for differena types of financing and borrowers, systematic analysis of recovery performance as a function of size and purpose of financing agreement, type of borrower, type of collateral, and quality of MCO supervision would be undertaken as a new M&E task. Monitoring of administrative costs of different types of financing agreements would also be introduced to assist in setting lending terms, planning ADBP's lending program, and refining the incentive system used for MCOs. As a further task, the M&E Unit would, in cooperation with the General Credit Operations Department, develop a new system of categorization for credit ledgers so that targeted categories of investment can be monitored. The adoption of Islamic lending modes would also require further monitoring arrangements. Technical assistance would be needed to assist in the development of a comprehensive work plan to be executed by the M&E Unit in the course of the project, and in achieving effective liaison between the M&E Unit and operational departments. Agreement has been reached with ADBP that the M&E Unit would: (i) assume, within a time-frame and under terms of reference satisfactory to the Bank, additional responsibilities so as to be better able to monitor the efficiency of ADBP as an institution, and to assess the impact of project implementation; (ii) prepare semi-annual monitoring and evaluation reports and submit them to the Bank for information; and (iii) prepare quarterly progress reports on the project in a format acceptable to the Bank, and submit these to the Bank within an agreed time-frame.

36 -31- Project Benefits and Risks 75. The principal benefit of the project would be the further strengthening of ADBP as a viable and well-managed lending institution for the agriculture sector. As a result of improving the allocation of funds for on-farm investments and farm inputs, it is expected that agricultural production and farm incomes would increase. During project implementation, a continual flow of investment credit to farmers would be ensured and, by the end of FY89, ADBP would make a substantially higher contribution to meet total demand for farm credit. Small farmers would have easier access to institutional credit through the expanded MCO scheme, and the innovative FMCO (functional) and MCOI (intensified) schemes. Accordingly, the share of landless and target group farmers in ADBP's lending would rise substantially. Unquantifiable subsidiary benefits would arise from ADBP's participation in formulating the country's mechanization strategy with respect to the evaluation and introduction of different types and sizes of tractors, appropriate implements, and other farm technology suitable for the smallholder. 76. The components financed under the project would directly benefit about 300,000 farmers scattered throughout the country and more than 2.1 million family members. Of the beneficiaries, it is estimated that about 4O0 will have pre-investment per capita incomes below Rs 1,989 (US$156), which is estimated (FY83) to be the poverty level in rural areas (expressed as 40% of GNP per capita). The project would generate about 62 million man-days of incremented employment annually at full development. Family labor relieved from farm operations as a result of mechanization (about 11 million mar-days) would be available for other productive activities, such as orchard maintenance, dairying, poultry, and vegetable farming, all of which are labor-intensive and emphasized by the project's diversification efforts. In addition, considerable short-term employment would be generated by construction associated with tubewell and watercourses and sheds for livestock (including poultry), the planting of trees for orchards and their maintenance, and the installation of polythene mini-tunnels on vegetable farms. 77. Individual investments would vary widely under the project so, for the purposes of economic analysis, representative farm models were developed in order to derive the rates of return to on-farm investments. Since major parameters affecting investments under the Fifth ADBP project have not significantly altered, both the economic rates of return (ERR) and the financial rates of return (FRR) for the proposed project are expected to be similar to those for the Fifth project, where the ERR were estimated to be larger than 50% for farm mechanization, 17-18% for dairy, and in the range of 30% to 50% for on-farm development investments such as poultry units and orchards. The FRR for farm mechanization range from 22% to 32% depending on tractor and farm size, somewhat lower than the ERR because one of the benefits, savings in family labor, is costed in the economic analysis but not in the financial analysis. The FRR for dairy investments range from 35% to 70%, much higher than the ERR because the financial prices for milk are higher than world

37 -32- market prices (reconstituted from milk powder and butter oil). The FRR for poultry and orchard investment are in the same order as the ERR. 78. Under the proposed project, new types of investment were analyzed that are expected to become more important as ADBP's efforts toward diversified lending gain momentum. Investment in a mould-board plow on a 40 ac rainfed wheat farm is expected to yield an ERR of 48% and an FRR of 45%. On a 10 ac irrigated wheat/cotton farm the same investment would have an ERR of 22% and an FRR of 18%. The lower rates on the irrigated farm stem from the fact that, according to farm trials carried out in Pakistan, introduction of primary tillage results in average wheat yield increases of 36Z in rainfed areas, but only 10% in irrigated areas. For investment in vegetable production the ERR was calculated to be higher than 50% and the FRR 49%. Apple orchard development would result in an ERR and an FRR of 41%. Minor irrigation investments were analyzed in depth in the recent SCARP Transition Pilot project. The ERR for that project is 23X and FRR for various types of tubewells range from 32% to over 50%. 79. As a continuation of earlier successful projects, risks, in many respects, are relatively small. ADBP has proven its ability to sustain growth in its loan portfolio while maintaining and even improving the quality of lending. Sound top-level management has helped to build the administrative capacity needed to handle high rates of growth and the implied volumes of lending, and should continue to do so. The Government maintains its strong commitment to ADBP's activities. The project's major uncertainty is the effect of Islamization on ADBP's administrative costs and financial position. Specific measures have been included in the project to help reduce this risk. PART V - RECOMMENDATION 80. I am satisfied that the proposed Loan and Credit would comply with the Articles of Agreement of the Bank and the Association respectively, and I recommend that the Executive Directors approve the proposed Loan and Credit. Attachments May 1, 1986 Washington, D.C. A. W. Clausen President

38 -33- Annex 1 T A SLEC 3A Page 1 of 6 PAltSTAN - SOCIAL INDSCATORS DATA SHET PAKISTAX 1CFERCNCC GRoUPS (wigghted AVZRACS) I HOST (HOsT RtCENT ESTIMATE) Lb RECENT LOW tncomn KIDDLE INCOME 1960igL 1970Lk tsima.k/b ASIA & PACIFtC ASIA * PACIFIC ADJUSTCD ENROLUI>T RATIOS P%IMARY: TOTAL MALI FEHALE SECONDARY: TOTAL MALE PFEALE VOCATIONAL (t OF SECONDARY) PUPIL-TEACHER RATIO PRIDALT CONDARY COUWII PASSENCER CARS/THOUSAND POP j RADIO UECEIVERS/TNOIJSAND POP TV RZCEIVECS/TNOUSAND POP NEWSPAPER ("DAILY GENERAL INTIEREST-) CIRCULATION PER TNOUSAND POPULATION CINEM ANNUAL ATTZMDANCE/CAPITA /i 2.2 Ic RANOR FORCC TOTAL LABOR FORCE (THOUS) FEMALE (PPRCENT) AGRICULTDRE (PERCENT) INDUSTRY (PERCE) K PARTICIPATION RATE (PERCENT) TOTAL KALI FEMALE ECONOMIC DEPENDENCY PATIO DISTIUTIOU PERCENT OF PRIVATE INCOME RECEIVED BY HICGEST 52 OF HOUSE' ilds 20.3 Ik 17.8 HIGHEST 20S 07F OUSEROLDS k LOWEST 20S OF HOUSFHOLDS k LOWEST 401 OF HOUSENOLOS k Pm TAR7C GROPS ESTUMD ABSOLUTE POVERTY INCOKE LEVEL (USS PER CAPITA) URBsAN 68.0 It /c RUIRAL ESTIMED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBJ'N li 88.0 /c RURAL S.l ESTIMATED POP. BELOW ABSOLUTE POVERTY INCOME LEVEL (2) URBAN 42.0 li 32.0 /c RURAL 43.o07i ;w NOT AVAILANE NOT APPLICABLE N O T e s /a The group averages for each indicator are population-weighted arithetic meane. Coverage of countriee _ong the indicators depends on availability of data and Se not uniform. /b Unlass othetsies noted, "Data for 1960" refor to any year between 1959 and 1961; "Data for 1970" betwcen 1969 and 1971; and data for 'Moot Recent ECtimate' be-wen 1981 and /c 1979; /d 1968; /e 1977; /f If registered, not all practising Ln the country; /g 1980; /h 1973; /S. 1972; aj JUNE. 1985

39 -34- Annex 1 TACLt 1 Page 2 of 6 PAI ITS - AL t"oicaic DATAD PAISTAN REPRNR GROUPS (ME WIf AWEOLE) L] MOST (POST NWN TIMAT) j * UI~~~~~~~~~~~~~KCRT jblowe t!cl stdm U.Ib tltiitjb FI t LAClil ASIA *I.ACILL AREA (mtams SQ. m) TOTAL NU3.9 6U3.9 a03.p AGRICULTURAL CP MR CAPITA U).... JU IuaI. ure! CIUIPTIOd PnT1 CAPITA (KILOCRAIS of OIL WOUIVALENT) Sn.u POPUZATIO AN VITAL gtatistics POPULATION.M1I-TEAR (THOUSANDS) URBAN POPULATION (2 OF TOTAL) 22.1 Z POPULATION PROJECTIONS POPULATION IN YTAR 2000 (HILL) STAnONARtY OPULATION (KILL) POPULATION POEIlHM -.e OPULATION DENSITY PER SO. Rl V PER SO. RM. ACtI. LAND ' 34d POPULATION AGE STRUCTURE (I) 0-14 YRS 43.6 ' YRS AND ABOVE ' POPULATION CR0 0 AT:l t TOTAL ' u L.i URAN! * CRUDE BIRIH RATE (PER TIIUS) U.1 CRUlE DEATH RATE (PER TiOUS) V.& CROSS REROUCTION RATE 3.' V FAN ILT PLANNI ACCEPTORS, ANNUAL (TROUS) Ic USERS (2 Or MARRIED lloei) Id b.5 INDEX OF FOOD PROD. PrEt CAPITA ( ) '..4 PER CAPITA SUPPLY OF CALORIES (t OF 1 1EQUtIEMENTS) U4.O PROTEINS (CRAMS PER DAY) OF 141ICM ANIMAL AMID PULSE I CHILD (AGES 1-)1 DEATh RATE ie LIFE ERPECT. AT BIRTH (tyears) * bo.5 6U.6 INFANT MORT. RATE (PER ThOUS) b ACCESS TO SAFL WATER (UPOP) TOTAL b u UN b tubal.. s ' ACCESS TO EXCRETA OISPOSAL (2 OF POPULATION) TOTAL * URSU RURAL POPULATION PER PHTSICIAN If POP. PER NURS1NG PERSONf 3MI B20.0 A POP. PER HOSPITAL BED TOTAL Ic UBAfN 5IO.D e50.0 7io.o 7; RURAL 226SO IIbtU.0 7' AD ISSIOMS PER HOSPITAL BED *1.1 ualjsinc AVERAGE SIZE OF NOU0SE0OLD TOTAL e.1 Ic URBA 5.b c RURAL 5.& 5.2 t0i te... AVERAGE NO. OF PERSUNS/ROWM TOTAL J In URBAN W. RURAL lb. PERCENTACE OF DWELLINGS WITH ELECT. TUTAL lb URBAN lhb RURAL.. '.9 7F

40 -35- ANNEX I page 3 of 6 DnuIMwrTw or SOCwL PDICATORS Notes Athughbd data ae drwn boumagmealyjudid i u dshmostlaortadi: and reliabk, it should ano be nosed that they my not be imtionally comparab bn of the lack of andanlnd diaiom ad cocept wmd by dirent cutries in colleong the dew. The data ate. nonetek, useful to deomibe of maitud indim tren d dmati certai maor dilfkna buweon couotries The mrtso.sroups am (1) thens country puop of th aubjeet country nd (2) a coutuy roup with somehst highr averag income tban the country roup of the asubjst m y (pt fobrhi 1com O Exponrt group wbr-midd icoe Norh Afric and Middk Ea is ch becam of suoftror sociocultural afti)lli bte t fn pmp dat the ampa -p popuation p it arhbaetic n for efac indiator nd shownly wnmsonty oftreouomuinrisina pomp bsudtfortbtindi4tor..sinehcovgofcofuiamongteindiatmt dpe n the vailaiity ordatao d is nw umrfom. cauti must beem d in in s ng tavea ofmindicator to snoie. Tb avga oly useful in compang the valofo o indicator a time among the ouury and -ate-. oup. AREA (thousand sq.km.) Crud Eh Rate (per thssd)-namber of ive births in the year TeadL-Total surface arca comprsing land area and inland waten; per thousand of mid-year population; and 1983 data and 1983 data. Crudk Deh Rae (per hreussd)-number of deaths in the year Agdembwul-Eszimate of agricultural area used temporarily or per thousand of mid-year population; , and 1983 data. perrnaendy for crops. pstures market and kitchen gardens or to Gross Repedadaa Rate-Averge number or daughtm a woman lie faliow, and 1982 data. will bear in her normal reproductive period if she experiences present age-specific fertility rates; usually five-year averages ending GNP PER CAPITA (USS)-GNP per capita estimates at current in and market prics. calculated by same conversion method as World,a,, Piel-i--Acceptrs Amal (ttsasj-annual num- Bank Ata, (1fr81413 basis); 1983 data. lber ofacceptors of birth-control devce under auspices of national ENERGY CONSUMPTION PER CAPITA-Annual apparent farnily p lnning program. consumpton of commercial priinary energy (coal and lignite. iuzly Plasa*-LUsers (peret ofarm ied wevom -The percenpetrolumn natural gas and hydro-, nuclar and geothermal elec- tage of ntar4ied women of child-bearing age who are pracicing or tricity) in kilograms of oil equivalent per capita; , and whose husbands are practicing any form of contraception. Women 1982 data. of child-beang age are generally women aged although for some countries contaceptive usage is measured for other age POPULATION AND VITAL STATISTICS groups. ladp19pe8i3 n. Mid-Yw (thousaudwd-as of July 1; FOOD AND NUTRITION and 1983 data. lr of Fad heof s Per Cy*a ( = 100)-Indcx of per ro atonie (ren es ton -Raio of urban to total capita annua production of al food commodities. Production population different definitions of urban ares mnay affect compar- exldsailfedndedfoagcutr.fdcmoiis ability Of data amnorg countiies; and 1983 data. excludes annunal feed and seod for agriculdture. Food comn odities ablt*oaamnoutis16.190nd18 include primary commodities (e.g. sugarcane instead of sugar) fp.aio a hlejetie which are edible and contain nutrients (e.g. coffee and tea are Pbpulation in year 2000-The projection of population for 20D. excluded); they comprise cereals. root crops. pulss oil seeds. made for each economy separately. Starting with information on vegetabes. fruits. nuts, sugarcane and sugar bee livestock, and total population by age and xx, fertility rtes mortality rates, and ivestock products. Aggregate production of each country is bastd international migration in the base year these parameters on national average producer price w-ights: and wer projected at five-year intervals on the basis of generalized 1982 data. assumptions until the population became stationary. Per Capita Supl o Cali (peewt ofreqireu-s)comput- Stationary population-ls one in which age- and sex-specific mor- ed from calorie equivalent of net food supplies available in country cality rates have not dianged over a long period. while age-specific per capita per day. Available supplies comprise domestfr producfertility rates have simultancously remained at replacement klvel tion. imports less exports. and changes in stock. Ne. supplies (net reproduction rate- 1). In such a population. the birth rate is exdude animal feed. seeds for use in agriculture. quantities used in constant and equal to the death rate, the age structure is also food processing. and losses in distribution. Requirements were constant, and the growth rate is zero. The stationary population estimated by FAO based on physiological needs for nornal activity size was estimated on the basis of the projected characteritics of and bealth considering environmental temperature. body weights. the population in the year and the rate of decline of fertility age and sex distribution of population. and allowing 10 percent for rate to replacement lvel. waste at household level and 1982 data. Popmdazion Momernwn-Is the tendency for population growth to Per Capita S#up of Proid (grans per dyj-protein content of continue bcyond the time that replacement-levd fertility has been per capita net supply of food per day. Net supply of food; iefined achieved. that is. even after the net reproduction rate has reached as above. Requirements for all countries established by USDA unity. The momentum of a population in the year t is measured as provide for minimum allowances of 60 grams of total protein per a ratio of the ultimate stationary population to the population in day and 20 grams of animal and pulse protein. of which I0 grams the year. given the assurmption that fertility remains at replace- should be animal protein. These standards.are lower than those of meat lvel from year t onward data. 75 grams of total protein and 23 grams of animal protein as an poplaionm Densty average for the orldd proposed by FAO in the Third World Food Per sqlkrm.-mid-year population per square kilometer (100 hec- Supply; and 1982 data. tares) of total area; and 1983 data. Per Capita Prtein Supply From Anionalnd Pvble-Protein supply Per sqjkm. agriczdural land-computed as above for agricultural of food derived from animals and pulses in grams per day; land only and 1982 data and 1977 data. Population Age S5cre (perceer)-children (0-14 years). ork- CAi (aqes 1-4) Deah Rate (per th.usand)-number of deaths of ing age (15-64 years), and retired (65 yea and over) as percentage children aged 1-4 years per thousand children in the same age of mid-year population; and data. group in a given year. For most developing countries data derived Pop.ktion Greatk Rate (perceul--eoal--annuai growth rates of from life tables; and 1983 data. total mid-year population for and HEArTH Popultion Grwt Rate (pereert)-ere-annual growth rates Life Erpe&rny as Birth (yewr)-number of years a newborn of urban population for and data. infant would live if prevailing patterns of mortality for all people

41 -36- ANNEX I page 4 of 6 at the time of of its birth were to sy the same throughout its lire; Pupl-teacher Ratio - primary, and sreodaury-total students en anud 1983 data. roled in primary and secondary levels divided by nwuber of AVAt Mwnelt Rat (per t_sef)-number of infants who die teachm in the corresponding levels. before reaching one year of ae per thou! and live births in a given year, 1960, 1970 and 1983 data. CONSUMPTION Acewsr rs. Water (powat of pq:am# -4oW, ui_, M_ Pawar CGr (per thusmd pelatim)-passenger cars comr-number of people (total. urban. d rual) with renonable prise motor can seating les than eight perons; excludes ambulaccm to sfe water supply (inude treed surface waters or ances. heares and military vehicles. untreated but uncontaminated wter such as that from protected R. ReceimS (per tlao_ui)au types Ot rceive bormholes springs and snitary weds) as percenta-s of their fapor, for radio broadcasts to general public per thousand of popuwation. tive populations. In an urbin are a public rountin or standpost excludes un-licensed receivers in countries and in years when located not more than 20 meters nt a house may be conskd registrion Of rdio sets was in clfec; data for cr,ct yeam may as being within reasonable acss of that house. In mrl are not eg be comparabdi since most countrief abolisrecent ysming muwnable aa e ould imply that the houewifeor member of the housibold do not have to spend a disproportionate part of the day TV Rereem ivs(per theadp apalat -TV recmeivrs for broadcast in etching the fsmily's water nead to genel public pcr thousand population; excludes unloensed TV Acce te Excrete Dspal (&pew cet pepuaenj)--4ot., i receivers in countries and in year when rgistration of TV sets was and wel-number of people (total, urban, and rual) served by in effect. excreta disposal as pecentages of their respective populations. uapew Circati (per thosndpopul-siuj-shows the aver- Excreta disposal may include the collection and disposal, with or age dmulation of -daily general interest newspaper." defined as a without treatment, of human excreta nd waste-water by water- periodical publication devoted pnmarily to recordingeneral news borne systems or the use of pit privies and similar installations. It is considered to be 'daily" ir it appers at lest four times a week. Poplatom per Ph,uida-Rbpulation divided by number of prac- CinAamE Atendae per Cata per YewY-Based on the tising physicians qualified from a medial school at university level, number ot tickets sold during the year, induding admissions to Abpuare per Nwuan PtrsowaPopulation divided by number of drive-in cinemas and mobile units. pracicing male and female graduate nurses assistant nursm. practical nurses and nursing auxiliaries. LABOR FORCE A~uladper Hp otol spitf Bed-ta wham. aid nowl-ftpulation Totai Labor arce (thoumands)-economically active persons in- (total urban, and rural) divided by their respective number of duding armned forces and unemployed but excluding housewives. hospital beds available in public and private. general antzd students. etc.. covering population of all ages. Definitions in hospitals and rchabiaitation o pterit Hospigals arc establshments various countries are not comparable; and 1983 data. pennanently staffed by at least onc physician. Establishments prov- fk (percent)-femakn labor fome as percentge of total labor iding pri-pally custodial care are not included. RuRI hospitals, force. however, include health and medical centers not permanently staffed Agviu_ue (percmntj-labor force in farming, forestzy, hunting by a physician (but by a medical assistant, nurse, midwife. etc.) and fishing as percentage of total labor force: and 1980 which offer in-patient accommodation and provide a limited range data. of medical ft&iities. lndury (percenr)-labor force in mining. construction. mnanu- Admission per Hospita Bed--Total number of admissions to or facturing and electricity, water and gas as percentage of total labor discharges from hospitals divided by the number of beds. fore; and 1980 data. Parciati ate (percent)-mta, mak_ mdnpfmale-prticipation HOUSING or activity rates are computed as total, nmle, and female labor force Arage Sigz of HoNehld (pernas per hauseodd)-rol, wham, as percentages of total. male and female population of all ages anrval-a household consists of a group of individuals who share respectivdy; and 1983 data. These are based on ILO's living quarters and their main meals. A boarder or lodger may or participation rates reflecting age-x strnicture of the population. and may not be included in the household for statistical purposes. long time trend. A few estimates are from national sources. Aerae Namyher of Perswo per oeem-tatal, rbn, ad,sl- Eceoenoc Dependency Ratio-Ratio of population under 15, and Average number of persons per room in all urban. and rural 65 and over, to the working age population (those aged 15-64). occupied conventional dwellings, respectivedy. Dwelling exclude non-permanent structures and unoccupied parts. INCOME DlSTRJLUTMON Percntae of Dweligs with Elcri*tp-tetal, srbhan and rw&- Percetoge of Total DiuposaMe Iwom (both 1i case aid kidl)- Conventional dwelings with eectricity in living quarers as percen- Accruing to percentile groups of households ranked by total housetage of total, urban. and rural dwellings respectively. hold income. EDUCATION POVERTY TARGET GROUPS Ajasted Emwfli et Ratios The following estimates are very approximate measures of poverty Prunary school - total. male and fenma-grs total. male and levels. and should be interpreted with considerable caution. female enrollment of all ages at the primary levd as percentages of Estnited Absolute Poverry lncenw Leid (USS per capita )-bn respetive primary school-age populations. While many countries gu rural-absolute poverty income lvel is that incomne kvel consider primary school age to be 6-11 years, others do not. The below which a minimal nutritionally adequate diet plus essential differences in country practices in the ages and duration of school non-food requirements is not affordable. are rflcted in the ratios given. For some countries with universal EFinted Relati Poey l1crn Lerd (USI per capita )-aran education, gross enrollment may exceed 100 percent since some ad rural-rural relative poverty income level is one-third of pupils are below or above the country's standard primnary-chool average per capita personal income of the country. Urban levd is age. derived from the rural level with adjustment for higher cost of Secondary school - total maek and female-computed as above; living in urban areas. secondary education requires at least four years of approved pri- Etmted Popuato BElow Absolute PArerty acense Levd (pamary instruction; provdes general, vocational or teacher training centd-urhan and oral- Percent of population (urban and rural instmctions for pupils usually of 12 to 17 years of age: correspond- who are 'absolute poor." ence courses are generally exciuded. Vocationdl Erollmeni (percent of seconday)-vocational institu- Comparative Analysis and Data Division tions include tecdnal industrial or other programs which operate Economic Analysis and Projections Department independently or as departments of secondary institutions. June 1985

42 -37- HEX I Page 5 of 6 CCONOMIC DEVELOPWZNT DATA GNP PER CAPITA IN 1982: US$380 Lj GROSS NATIONAL PRODUCT IN 1983/84 Lk ANNtAL RATE OF GROWTH (Z. constant orices) USS Dillion / / / / /84 CUP nt market pricrn Gross domestic investment Gross national saving Current account balance Exports of goods. NFS Imports of goods, NFS OUTPUT, LABOR FORCE AND PRODUCTIVITY IN Value Added Labor Force /c V. A. Per Worker S million 2 Million 2 USS Z Agriculture Induntry Ld Services 12, IA Total/Average 27,679 O GOVERNMENT FINANCE Central Government fe Federal Government (Re billion) Z of GDP (Rs billion) I of. GDP 1983/84 Lf / /84 /f /84 Current receipts Current expenditures Current surplus Capital expenditures Lg External assistance (net) MONEY. CREDIT AND PRICES 1974/ / / / / / / / /84 Ih (Rs billiqa) Honey and quasi money Li , Dank credit to public sector Bank credit to private sector (percentages or index number.) Money and quasi money as 2 of GDP Consumer price index (1969/70-100) Annual percentage changes in: Consumer price index Bank credit to pubil- sector lank credit to private sector la Based on World fank Atlas methodology and calculated at an average of prices and exchange rates. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. /b Provisional. le Projection for 1983/84. Does not include unemployed labor force. Id Includes manufacturing, miring, construction and electricity and gas. le Consolidated revenues and expenditures of Federal and Provincial Governments (excluding Federal-Provincial Government tranefers). If Revised budget data. L/ Excluding principal repayments of foreign loans. Capital expenditures aa defined in government budget include certain current expendituree also. /b Provisional. Ii Monetary statistics of Pakistan have been fully adjusted for demonetized notes. devaluation snd revaluation of the rupee, etc. as from June 30, Data for 1974/75 from State Bank sources are not strictly comparable vith IMF estimates for earlier years. Not applicable. Not available. March 1985

43 -38- ANNE Page 6 of b BALANCE OF PAYMENTS MZRCIIIDISB EXPORTS (AVERAGE 1979/ /84) 1979/ BI/82I1L982/ USS millioni CUSS nillion) Exports of goods, NFS ,461 3,052 3,416 3,439 Raw cotton Imports of goods, NFS 5J ,679 i6ala Cotton yarn Resource gap (deficit - -) -2,754-3,OC ,172-3,619 Cotton cloth Rice lutwest payments All other comodities Workers remittances 1,748 2,097 2,224 2,887 2,737 Total 2, Other factor payments (net) Net transferm Balance on current account -1, , ,000 EXTERNAL DEBT. JUNE 1984 Direct foreign investment Net MLT borrowing US Lmillion Disbursements 1, ,301 1,248 Amortization -31Q Public debt, including guaranteed 9,890.4 Sub-totel Non-guaranteed private debt Le Transactions with IMF fe Total outstanding end disbursed 9,890.4 Other items n.e.i. lk Increase in reserves (-) , DEBT SERVICE RATIO FOR 1983/84 /f Cross reserves (end year) fj 748 1, ,911 1,731 Petroleum imports /d ,535 1,710 1,610 1,423 Public debt, including guaranteed 15.6 Petroleum exports Id Non-guaranteed private debt Total 15.6 RATE OF EXCHWNGE IBRD/IDA LENDING (Decemiber 1983) (USS Willion) Thronab May From HMa Feb IBRD IDA US$a - Rs USS1 - Rs Outstanding and disbursed ,144.7 Rs 1 - US$0.21 Rs 1 - USS0.09 Undisbursed Outstanding including undisbursed ,761.9 From Feb Jan From Julv 1981-June 1982 fg From July 1982-June 1983 IL From July 1983-June 1984 ft US$ 1 - is 9.90 USSI - Rs US$1 - Rs US$1 - Is Rs 1 - US$0.10 Rs I - US$0.095 Rs 1 - USSO.078 Rs I - USS0.074 /e Including Trust Fund. Li Including net sbort-term borrowing and errors and omissions. ft Excluding gold reserves of about 1.8 milliol troy ounces. Ij Crude and derivatives. ft Non-guaranteed private debt service is negligible. /f Ratio of actual debt service to exports of goods, factor and non-factor services; debt service includes IMF charges. L Effective January 8, 1982, the rupee is to be managed with reference to a weighted basket of currencies. The average exchange rate shown is vis-a-vim USS for the period shown. Not available. March 1985

44 -39- An Page 1 STATUS OF 5A-G CR0ou OPERATION8 IN PAKISTAN A. STATEENT rof UPr LOINS AND IDA CREDITS (as of Sentenber ) 1* (USS million) Loan/ (Amount net of cancellations) Credit Fiscal Undi- Number Year Purnose Bnk Tw IDA bursed Ninety-eight loans and credit. fully disburmed Lk LL Irrigation 6 Drainage (Kheirpur) Punjab Livestock Developmwnt Salinity Control & Reclamstion Punjab Ext. & Agric. Des Salinity Control & Recl. (fardan) Primary Education Sind Agricultural Extension Third UAPDA Power Third Highway PICIC Industrial Development /e 1981 Vocational Training e 1981 Smll Industries /L 1981 Grain Storage fl 19BI Agricultural Research /L 1981 On-Farm Water Management /e 1982 Industrial Development (IDBP II) Fourth Telecommunication Fertilizer Industry Rebabilitation Reservoir Maintenance Facilities Agricultural Dev. (ADSP V) Fifth Sui Northern Gas Pipelines /e 1982 Irrigation S) teas Rehabilitation fj 1982 Baluchiatan Minor Irrig. & Agr fe 1982 Technical Assistance /e 1982 Eleventh Railway Project U e 1983 Lahore Urban Development e 1983 Population /e 1983 Coal Engineering fe 1983 Karachi Water Supply /e 1983 Fourth Drainage B Agricultural Development (ADBP V) Refinery Engineering Project Petroleum Exploration Second Toot Oil and Gac Development Induatrial Inveatkent Credit /e 1984 Industrial Investment Credit e 1984 Integrated Hill Farming Development /e 1984 Second Technical Assistance Commnd Water Management Second Small Industries Left Bank Outfall Drain - Stage I Baluchistan Agricultural Extension Fourth WAPDA Power L 1985 Second Primary Education /c 1985 Second On-Fern Water Management Energy Sector Loan Petroleum Reaources Joint Venture /c 1985 Fifth WAPDA Power Total 1, , l461.2 of which hba been repaid Total now outstanding ,158.6 Amount sold 29.9 of which baa been repaid Total now held by Bank and IDAld 998l Total undisbursed /a The status of the projects listed in Part A is described in a separate report on all Sank/tDA financial projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. /b Excludes the disbursed portion of loans and credits vholly or partly for projects in the former East Pakistan which have now been taken over by Bangladesh. /c Not yet effective. /d Prior to exchange adjustment. /e IDA Credita under the 6th Replenishment denominated in SDRa. The principal is shown in U$ equivalent at the time of negotiation. Disbursed amounts are computed at the exchange rate applicable on the transaction dates. Undisbureed wounts are valued at the exchange. rate applicable on the date of this statement jf By using tbe market rate on dates of disbursements, the current principal for Credit 1066-PAZ and Credit 1255-PAM (both fully disbursed) is $42.5 Sad $77.5. respectively.

45 -40- ANNEX II Page 2 B. STATEMENT OF IFC INVESTMENT, (as of September ) Fiscal Amount In US$ Million Year Obliror TIvDe of Business Loan Equity Total 1958 Steel Corp of Rolled Steel Pakistan Ltd. Products Adanjee Industries Ltd. Textiles Gharibwal Cement 1965 Industries Ltd. Cement PICIC Development Financing Crescent Jute Products Textiles Packages Ltd. Paper Products Pakistan Paper 1976 Corp Ltd. Paper Dawood Hercules Chemicals Ltd. Fertilizers Milkpak Ltd. Food and Food Processing Pakistan Oilfields Ltd. and Attock Chemicals and Refinery Ltd. Petrochemicals Fauji Foundation Woven Polypropylene bags Premier Board Mills Ltd. Particle Board Habib Arkady Food and Food Processing Asbestos Cement Pakistan Petroleum Chem-'cal and Ltd. Petrochemicals National Dev. Money and Leasing Corp. Capital Market Total Gross Commitments Less: Cancellations, Terminations, Repayments and Sales Total Commitments Now Held by IFC Undisbursed (including participants)

46 -41- ANNEX III Page 1 of 2 PAKISTAN SIXTH AGRICULTURAL DEVELOPMENT BANK Supplementary Proiect Data Sheet Section I: Timetable of Key Events (a) Time taken to prepare the project: One year (b) Agency which prepared project: ADBP Cc) Date of first mission to consider the project: July 1984 id) Date of departure of appraisal mission: August 1985 Ce) Date of completion of negotiations: March 28, 1986 Cf) Planned date of effectiveness: September 1986 Section II: Special Bank and IDA Implementation Actions None Section III: Special Conditions ADBP would be required to: Ca) prepare and implement a staff training plan, to be updated annually in accordance with training needs (para. 68);

47 -42- ANNEX III Page 2 of 2 (b) submit to the Bank for concurrence a comprehensive action plan for expanding the use of FCNOs and MCOIs in the project period (para. 69); (c) review its collateral policy under Islamic banking; submit to the Bank recommendations resulting from such review; and implement these recoimendations as necessary to facilitate access of smallholders and the landless to institutional credit (para. 69); (d) strengthen its Credit Policy and Appraisal Department to train all MCOs in new appraisal techniques and be able to modify and redefine on-farm appraisal techniques on a continual basis (para. 70); (e) extend in each fiscal year at least 75% of all medium and long-term farmers' loans or financing to farmers with 25 ac or less; at least one-half of this lending volume to go to farmers with 12.5 ac or less (para. 72); (f) analyze, in annual reviews, the effects of Islamic banking on income generation and iuplement appropriate measures to ensure a continued satisfactory financial position and profitability (para. 73); and (g) take all measures necessary to reach minimum recovery rates of at least 77% by June 30, 1987; 79% by June 30, 1988; and 81% by June 30, 1989 (para 73). The execution of a Financing Agreement between the Government and ADBP would be an additional condition of Loan/Credit effectiveness (para. 63).

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